Margin is the money borrowed from a broker to purchase an investment and is the difference between the total value of an investment and the loan amount. Margin trading refers to the practice of using borrowed funds from a broker to trade a financial asset, which forms the collateral for the loan from the broker.
- Trading on margin allows you to borrow funds from your broker in order to purchase more shares than the cash in your account would allow for on its own. Margin trading also allows for short-selling.
- By using leverage, margin lets you amplify your potential returns—as well as your losses, making it a risky activity.
- Margin calls and maintenance margin are required, which can add up losses in the event a trade go sour.
For example, take a look at the MetaTrader 4, also known as MT4, trading platform:
The metrics above are all intertwined.
A change in one causes a change in another.
So you need to know what these metrics are!
You also need to know what these “bad things” are!
Make sure you have a solid grasp of how your trading account actually works and how it uses margin.
So let’s dive right in.
A margin trading account displays the following metrics:
- Balance
- Used Margin
- Free Margin
- Unrealized P/L
- Equity
- Margin Level
A metric is just a measurement of “something”.
This means that every metric above measures something important about your account involving margin.
For example, the “Balance” measures how much cash you have in your account. And if you don’t have a certain amount of cash, you may not have enough “margin” to open new trades or keep existing trades open.
Depending on the trading platform, each metric might have slightly different names but what’s being measured is the same.
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