What is margin and why is it important for traders?

Understanding the Meaning of Margin

When talking about margin, traders often confuse it with fees or costs. But in reality, margin is not any of those. It is a portion of your account funds set aside by the broker as collateral to give you the ability to control contracts worth more than your available funds.

When you open a new trading position, part of your account balance will be “locked” as margin to cover potential losses and to ensure that the broker can recover the debt if the trade goes against you.

Initial Margin (Initial Margin) - IM

Initial margin is the amount of money you need to allocate to open a trading position initially. For example, if you want to control a trading contract worth $100,000 and the broker sets the initial margin at 1%, you only need to deposit $1,000. The remaining $99,000 will be controlled with leverage.

The calculation is straightforward:

Initial Margin = Contract Value × Margin Ratio (%)

Practical example: If you open with 200:1 leverage (which equals a 0.5% margin) and you want to trade a mini lot valued at $10,000, you only need to deposit $50 ($10,000 × 0.5% = $50). This is the power of leverage.

Maintenance Margin (Maintenance Margin) - MM

While initial margin is the amount you need to prepare to open a position, maintenance margin (or called free margin) is the minimum amount that must be kept in the account to keep the position open.

This system works as follows: To continue trading, you must maintain sufficient funds in your account to meet the maintenance margin requirements. Usually, this requirement is set at 50% of the initial margin paid.

Maintenance Margin = Current Contract Value × Maintenance Margin Ratio (%)

where: Maintenance Margin Ratio (%) = Initial Margin Ratio (%) × 50%

Real-life Scenario: What is a Margin Call?

Imagine you deposit $1,000 as initial margin to open a trading position. Normally, your maintenance margin will be $500 (50% of $1,000).

Problematic situation: If your trade starts losing and your account balance drops below $500 the broker will issue a “margin call,” meaning you must deposit additional funds immediately.

If you do not add funds to your account as required, the broker has the right to automatically close your position to stop further losses. This is a risk management measure used by brokers, but it also poses a significant risk for traders.

The Relationship Between Margin and Leverage

Margin and leverage are two sides of the same coin. High leverage (such as 100:1 or 200:1) means that the margin required is very small. But this is a double-edged sword: profits can multiply enormously, but losses can also increase rapidly.

Therefore, smart margin management is an essential skill for traders using leverage.

Things to Remember

• Margin is only collateral, not a fee or cost. It will be released back to your account when you close the position.
• Initial margin is the money required to open a new position.
• Maintenance margin is the minimum amount you must keep to keep the position open.
• A margin call occurs when your account falls below the maintenance margin, and you must add funds immediately.
• A good understanding of margin will help you manage risks effectively and avoid unnecessary capital losses.