Margin definition

Example of margin

Say, for instance that you wanted to purchase $1000 worth of shares of company ABC. If you were to buy the shares through a traditional broker, you'd need to pay the full $1000 up front to own them. However, if you decide to trade on margin, you'd only need a fraction of this cost up front. If your provider requires 20% of the position to be put forwards as margin, then the initial amount needed for the trade would be $200.

Pros and cons of margin

Pros of margin

Margin can magnify your profits, as any gains on your position are calculated from the full exposure of the trade, not just the margin you put up as deposit. Buying on margin means that you have the potential to spread your capital even further, as you can diversify over a wider array of positions.

Unlike unleveraged products, trading on margin enables you to go short on markets - so you can profit from markets that are falling price, as well as rising.

Cons of margin

Although margin can magnify profits, it can also magnify losses if the market moves against you. This is because your loss is calculated from the full value of the position, not just the margin. However, there are steps that can be taken to mitigate the negative side of margin, such as implementing a risk management strategy.