Margin

Margin is the money a broker requires an investor to deposit as security when lending funds to open a position larger than the cash put up. It is the deposit behind leverage: the broker finances the bulk of the position, and the margin absorbs losses first. If losses reduce the margin below the broker's required level, the broker may demand a further deposit or close the position.

A worked example

Suppose a broker requires 20 per cent margin. Opening a hypothetical £10,000 position therefore takes a £2,000 deposit, with the broker financing the remainder. If the position falls 10 per cent, to £9,000, the £1,000 loss comes entirely out of the investor's £2,000 margin, which is halved to £1,000 — a 50 per cent loss on the money committed, produced by a 10 per cent move in the position.

Margin describes the security arrangement, not the boundary of loss. In a sharp enough move a position can lose more than the margin held against it, leaving the investor owing the difference, and the figure itself says nothing about when a broker will call for more.