Margin deposit definition

What is a margin deposit?

A margin deposit is the initial amount of money a trader needs to put down in order to open a leveraged trading position. It can also be known as the initial margin, deposit margin or just as the deposit.

Leveraged products, such as CFDs and spread bets, enable traders to open a position with just a fraction of the capital required. Although this has the potential to magnify your profits, it can also magnify your losses.

The margin deposit is usually stated as a percentage of the full value of the trade – it is determined by leveraged provider’s margin system. The amount needed as a deposit margin depends on the derivative being used and the market being traded. Markets with higher volatility or larger positions may require a higher deposit margin.

A margin deposit is one of two main types of margin needed to hold an open leveraged position.

The other is called maintenance margin. This is the term used to describe the additional funds that might be needed to cover any running losses or keep a position open.

Why are margin deposits used?

Trading on margin enables you to gain full market exposure with just the initial deposit – potentially enabling you to open a larger position than would otherwise be possible. However, it is important to consider your trade in terms of its full value (not just the margin deposit), as both the profit and loss will be calculated from the total exposure.

Example of a margin deposit

Say you want to open a CFD trade on 80 shares of company ABC, which are currently trading at $100. Your leveraged trading provider has a deposit margin requirement of 20%, so although the total value of your position is $8000, the total margin deposit required is only $1600 (20% of 80 multiplied by 100). You would still stand to profit from the full value of the trade, but you wouldn’t have to put up a large sum of money upfront.

While margin trading can increase your profits, it can also lead to amplified losses if the market were to turn against you.