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The Best and Worst Ways to Margin Trade
Everything you want to know, broken down
Among the myriad services that brokerage companies offer, one of them is allowing you to trade on margin.
Margin comes as a standard option you can choose when you complete your application for any brokerage account, whether that’s Robinhood, Ameritrade, Fidelity, or Interactive Brokers.
Margin is the money borrowed from a brokerage service to purchase an investment; that could be in the form of equity (stock), derivative (movement on the price of the stock), or futures (commodities, futures options, etc).
In shorter words, to margin trade is to take a loan. The amount of loan you can continuously borrow along a time period is what’s called your margin requirement or maintenance margin. This is the amount of money you need to have in your account in equity — either stock or cash — going forward so that the brokerage service doesn’t feel worried about your ability to cover your loan. If you have mostly stock equity, this number will change as the stock value changes. If you have mostly cash, this number stays right about the same.
Margin borrowing is backed by your very own cash and stretched by the amount of leverage you desire. It’s your ability to financially reach what you otherwise couldn’t.
