Margin is the amount of capital an investor must deposit and keep locked in their brokerage account as collateral to cover the credit risk associated with an open leveraged or derivative trade. Rather than a purchase cost, margin functions as an earnest performance bond held by the broker while a trade remains active.
How it works
When an order is submitted, the broker earmarks a specific dollar amount (initial margin) from the account's available cash balance.
This earmarked capital cannot be withdrawn or used to open new trades until the original position is modified or closed.
Why it matters
Margin dictates how many contracts or shares an account can hold simultaneously without breaching risk rules.
Failing to maintain adequate account equity relative to locked margin leads directly to margin calls or forced liquidation.
A simple market example
If a futures contract specifies a 5% initial margin requirement and trades at a notional value of $40,000, the trader must have at least $2,000 in free equity locked to execute one contract.
Common mistakes
Confusing margin with transaction commission fees; margin is collateral that is returned (adjusted for P&L) upon exit.
Utilizing 100% of account cash for margin requirements, leaving zero free equity cushion to absorb normal adverse market noise.
Frequently asked questions
What is free margin versus used margin?
Used margin is the total cash currently locked as collateral for active positions. Free margin is the remaining account equity available to absorb losses or initiate new trades.
Why do margin requirements increase before major news events?
Brokers raise margin requirements to protect accounts against severe liquidity vacuums and weekend price gaps during volatile macro releases.
What is a margin call?
A margin call is a formal alert from a broker demanding that a trader deposit additional funds immediately to restore account equity above the required threshold.
Educational content only. Definitions describe common market usage and may vary by jurisdiction, instrument, or institution.