What is margin?

In online trading, Margin is the amount a trader has as collateral to cover any losses incurred by a losing trade. It is measured as a percentage of the current market value of the securities held in the account.

It can also refer to a loan taken out by a trader in order to buy securities. This is known as "buying on margin".

In business, margin refers to the difference between the cost of producing a goods or service and its sale price.

Margin in online trading

Just as leveraging a trade carries a high risk, margin has its own risks. For example, a trader buying on margin has to make interest payments on the loan, and must ensure there is enough in the margin account to cover themselves if the market moves against them.

Suppose you want to trade a $100,000 position with a 100:1 leverage; your broker will require $1,000 as security from your account. The $1,000 can be seen as a deposit you have to make before you can control the $100,000. This deposit is known as a margin or initial margin.

The margin is usually expressed as a percentage of the position amount, meaning that the broker will require a 2%, 5% or 10% margin. So if you open an account with $10,000 and the margin requirement of the broker is 5%, the initial margin would be $500.

It is very important that you only trade sizes that will not harm your account and avoid any margin calls. Make sure you have a good knowledge on this matter and on money management in general:

Learn how to use important tools like risk-to-reward ratios and stop losses to maximise your profits and minimise losses.

Margin in business language

Here, the margin is difference between the cost of producing a goods or service and its sale price.

A sales strategy such as "pile it high, sell it cheap" can operate on a low margin because the profit is generated by the high volume of sales. For high-end products, the margin will be much higher and the company will expect to sell fewer units but at a far higher profit.

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