Margin explained

Margin is the money you must set aside in your account to open and maintain a trade

By putting up margin, you’re setting aside a relatively small deposit for the full value of your trade. We will then essentially lend you the rest of the money. So if you ever hear someone talk about trading ‘on margin’, it’s just another way of saying trading with leverage.

There are two types of margin you need to be aware of.

1. Initial margin

Initial margin is the amount of money you need to open each individual trade in the first place. You’ll also hear this referred to as your initial deposit. 

Different trades will require differing levels of initial margin. This depends on:

  • The size of your position – As you’d expect, smaller trades require a smaller margin amount, while larger trades require more margin
  • The market you are dealing in – Often the less volatile it is, the lower the margin will be
  • Whether you have any safeguards in place – If you’ve limited your risk, by using a guaranteed stop for example, your margin could be calculated in different ways depending on the size of your trade

Calculating initial margin

Typically, initial margin is calculated as:

The margin requirement depends on the market you’re trading on. At IG we request as little as 0.5% margin for major currency pairs, and up to 25% or more among less popular, or more volatile, shares and indices. 

Say you want to buy 1000 shares of Company ABC, currently at a price of 475c a share. 

If you traded these shares traditionally, it would cost you $4750 (1000 x $4.75). If, however, you placed a CFD trade on the equivalent of $4750 worth of shares, you might only be required to pay a margin of as little as 5% of this value, which would be $237.50 ($4750 x a margin requirement of 5%).

If the share price then rose to 500c your profit would be $250 in both cases. With margin, however, you’ve only had to put down $237.50 instead of the full $4750.

2. Maintenance margin

Because your initial margin only represents a small portion of the full value of your trade, if the market moves against you, it might not be enough to cover your losses

Maintenance margin – also known as variation margin – is the extra amount you need to pay should this happen. It will increase as your losses increase, so you need to ensure there’s enough money in your account to cover maintenance margin at all times.

Calculating maintenance margin

Say you want to go long on Company XYZ. It has a buy price of $2.20, and you choose to trade 8,000 shares. 

Your trade has a total value of $17,600 (8,000 x $2.20), and your provider asks for a margin of 5%.
This means your initial margin works out at $880 (5% of $17,600). As you have $4000 in your account, you have enough funds to open this position. 

Company XYZ’s price then drops 50 points to $1.70. This reduces the overall value of your position to $13,600 (8000 x $1.70). 

Although this reduces your initial margin to $680 (5% of $13,600), you now have a running loss of 50 points. This means you now owe maintenance margin of $4000 (8,000 x $0.50 points) bringing your total margin requirement to $4680. This example is illustrated in the table below.

  Share price = $2.20 Share price = $1.70
Trade size 8,000 shares 8,000 shares
Total value of trade
(Trade size x share price)
$17,600 $13,600
Initial margin
(Total value of trade x 5%)
$880 $680
Maintenance margin
(Trade size x points lost)
$0 $4000
Total margin
(Initial + maintenance)
$880 $4680

But because you hadn’t allowed for this margin management in your account balance, you’re $680 short of the full amount. When this happens, you will be on a margin call. If you don’t add more money promptly, your position may be scaled back, or even closed entirely.

So you need to make sure you keep an eye on your running losses, and ensure you always have enough money in your account to cope with them.

Take a free course with IG Academy

Find out how trading works – and get to know the people and processes involved – with our interactive online course.  

You might be interested in...