Key Points
A trader only needs to deposit part of the full value of the trade
Because profit and loss are based on a trade’s full position, margin trading can amplify both
The margin amount or percent is how much of the transaction value you need to have in your account to make the trade
Requirements depend on each individual asset; for example, 20% for shares, 5% for forex and 5% for indices
It's typically used through derivatives like spread bets and CFDs
What is margin?
When using margin, this allows you to trade larger amounts by depositing a smaller initial outlay. You only need to deposit a percentage of the full value of the trade to open a position. This deposit, or initial outlay, is known as the margin requirement. You can invest more than the money that you already have in your trading account by borrowing money from your broker to leverage your trades and get higher returns.
It is important to remember that with margin trading, profits and losses are based on the full value of your trade. Margin trading can magnify gains, but it can also significantly magnify losses if the trade moves against your predictions. As a result, it is possible that you could lose more than you deposit. Margin trading can be a double-edged sword, so it makes sense to research the markets, build an effective strategy, and create your strategy template before you start trading.
Spread betting and CFD trading are popular forms of financial derivative trading that enable traders to trade on margin. Spread betting is available in the UK only, while CFD trading is available globally across many countries. Learn the difference between spread bets and CFDs here.
Is it the same as leverage?
Trading with leverage or margin are similar concepts, expressed in different ways. Margin trading is how much of the trade value you need in your account to initiate the trade, such as the 20% discussed above. Leverage is the size of the position relative to the amount of capital required to initiate the position. For example, a £10,000 trade with £2,000 in the account means a leverage ratio of 5:1 is being used.
