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Margin Requirements

Margin requirement is only applicable to margin trading. It allows you to hold a position much larger than your actual account value. Margin requirement or deposit is not a down payment on a purchase. Rather, the margin is a performance bond, or good faith deposit, to ensure against trading losses. Trading platforms often perform automatic pre-trade checks for margin availability and will execute the trade only if you have sufficient margin funds in your account.

In the event that funds in your account fall below margin requirement, most trading systems will automatically close one or more open positions. This prevents your account from ever falling below the available equity even in a highly volatile, fast moving market.

For example, you may be required to have only $1,000 in your account in order to trade position that would normally require $20,000. The $1,000 (5%) is referred to as "margin". This amount is essentially collateral to cover any losses that you might incur. Margin should reflect some rational assessment of potential risk in a position. For example, if a market instrument is very volatile, a higher margin requirement would normally be justified.