A Starter Guide to Margin Trading

Margin is a tool traders and investors can use to increase their buying power. For stocks, it can mean using eligible securities in your portfolio as collateral for a loan from your broker that you can use to buy more securities. For products like futures and forex, margin is the initial amount of funds required to enter a position—typically a fraction of the position's total value. This article covers the basics of the different types of margin and links to a number of resources for learning more.

Margin works differently depending on the account type or market. For example, there's a big difference in how margin is calculated in a stock brokerage account compared to a forex or futures account. Each margin type can be used by a different category of investor and can be used to pursue their specific objective.

It's important to understand the way margin works before diving in. The Federal Reserve's Regulation T, or Reg T, governs how much an investor can borrow using margin in a brokerage account. Your broker can also set their own margin requirements, but the amount can't be less than the typical 50% required under Reg T. This type of margin is often used to buy stock or to use portfolio holdings as collateral for a loan. 

Once the margin account is open and operational, an investor can purchase stock by paying the required margin and borrowing the balance from the broker. The borrowed money is subject to interest, which accrues daily, and—in most cases—allows investors to buy twice as many shares with the same amount of capital.

Ready to learn more about the risks and benefits of a Reg T margin account?

1. Start with these introductory articles: Margin: How Does It Work?, What to Know About Margin, and Basics of Buying on Margin: What's Margin Trading?
2. Once you have a handle on the basics, consider 3 Ways to Use Margin and Leverage
3. From there, you might want to learn How Traders Can Apply for Margin

If a margined stock position falls below a certain threshold (known as the maintenance margin level), the broker will likely issue a margin call. Not sure when a margin call might happen?

• Here's how to prepare for Your First Margin Call
• And How to Handle Margin Calls

Investors who have built up their portfolios can sometimes use their assets as collateral. This means borrowing money and paying interest on the loan until it's repaid.

• Here's a video that shows 3 Ways to Borrow Against Your Assets
• And further reading on Leveraging Your Assets to Manage Your Wealth

Short selling, day trading, and options strategies have varying margin requirements. For example, buying puts and calls requires paying the full options premium; margin is not involved. However, certain options strategies and short selling stock require margin accounts.

Short selling involves borrowing shares from your broker, selling them in the market in anticipation of a move lower in price, buying the stock back later (ideally at a lower price), then returning shares to the lender. Keep in mind, this strategy involves potentially unlimited risk.

• Short Selling: The Risks and Rewards covers the basics.
• And watch this video to see what might motivate a short sale: Short Selling: Can Your Profit from a Falling Stock?

Options are versatile investments that can offer potential opportunities in up, down, or sideways-trending markets. Securities and index options strategies can also have various levels of risk and must be done in an account approved for options trading. Remember: options are not suitable for all investors.

• Check out this video to see how options work and their potential risks: Investing Basics: Options
• And how the collar options strategy can be used to help protect a stock that was bought with or without margin: Collaring Your Stock for Temporary Protection
• To see an example of an options strategy that requires margin, read How Could Vertical Spreads Help Your Strategy
• Also, there are times an options strategy can result in an unintended margin call, which is explained in the Options Exercise, Assignment, and More: A Beginner's Guide article.

Day trading involves the purchasing and selling (or short selling and purchasing) of the same security on a single day within a margin account. If you make four or more day trades over the course of five business days, and those trades account for more than 6% of your account activity over that time period, your margin account will be flagged as a pattern day trader account.

• If you want to know if PDT rules apply to your trading, check out this video: The Pattern Day Trading Rule Explained
• And this article highlights some of the risks and opportunities: What Is Day Trading? Rules, Risk, and More

While the 50% Reg T margin requirement is relatively straightforward, other types of margin are a bit more complex. Portfolio margin, for example, requires a theoretical pricing model.

First introduced in 2007, portfolio margin is available to investors who meet minimum qualification requirements (at Schwab, each account must have full options trading approval and an initial value of at least $125,000). The amount of margin required for an investment is calculated based on correlations of different assets in the portfolio margin account.

1. Before you consider applying for portfolio margin, you might want to see how it compares to Reg T margin in this video Portfolio Margin Explained and the article Portfolio Margin vs. Regulation T Margin
2. And here's another helpful explainer on the topic: Understanding Portfolio Margin
3. Portfolio margin can have additional advantages for option traders, which are discussed in the article Option Traders: How Portfolio Margin Works

Margin is a feature of futures. That is, futures always involve margin, but it works quite a bit different than Reg T and portfolio margin. Margin is the amount of funds required to enter a futures position, typically a fraction of the total contract value. 

• Here's an explanation of the key difference: Trading Futures vs. Stocks: What's the Difference
• For a deeper dive into futures margin, consider reading this article How Futures Margin Works and watching this video Understanding Futures Margin

Forex is the market where currency pairs trade; minimum margin requirements are set by the NFA (National Futures Association), but the margin required to buy and sell can vary by broker. It's usually a small percentage of the total size of the forex position. 

• If you have no prior experience trading currencies, consider starting your learning with Investing Basics: Forex
• From there, you can find more information about how margin works here: Understanding Forex Margin

If you want more information about margin, check out the Margin page on Insights & Education. Margin can have several different meanings and many different applications in the financial world. While it can increase potential gains, margin can also magnify potential losses. To see how margin works in real time, traders can begin practice trading stocks, futures, and forex with paperMoney® on the thinkorswim® platform.