Margin

Definition

Margin refers to the collateral that an investor must deposit to cover the credit risk of their financial position. It is commonly used in trading commodities, stocks, and other financial instruments to mitigate risk.

5 Must Know Facts For Your Next Test

1. Margin requirements are set by exchanges and brokers to manage risk.
2. Initial margin is the amount required to open a position, while maintenance margin is the minimum balance needed to keep it open.
3. Margin calls occur when an account's equity falls below the maintenance margin requirement, prompting a request for additional funds.
4. Using margin can amplify both gains and losses due to leverage.
5. Regulations such as Regulation T in the U.S. govern the use of margin in trading activities.

Review Questions

• What is the difference between initial margin and maintenance margin?
• How does a margin call work in commodity trading?
• Why might using margin increase both potential gains and losses?

Related terms

Leverage:

The use of borrowed capital to increase the potential return of an investment.

Margin Call: A broker's demand for an investor to deposit additional money or securities to cover possible losses.

Hedging:

Investing in a way that reduces the risk of adverse price movements in an asset.