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Firstrade is a discount broker that provides self-directed investors with brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. Options trading involves risk and is not suitable for all investors. Options trading privileges are subject to Firstrade review and approval. Please review the Characteristics and Risks of Standardized Options brochure and the Supplement before you begin trading options.
ETF trading involves risks. Before investing in an ETF, be sure to carefully consider the fund's objectives, risks, charges, and expenses.
Please read the prospectus carefully before investing. Leveraged and Inverse ETFs may not be suitable for long-term investors and may increase exposure to volatility through the use of leverage, short sales of securities, derivatives and other complex investment strategies.
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Related Terms Risk-Based Haircut Risk-based haircuts reduce the recognized value of an asset below its current market value to help protect investors from having to cover a margin call. What Does Marginable Mean in Trading? Marginable securities trade on margin through a brokerage or other financial institution. Liquidation Level Definition The liquidation level, normally expressed as a percentage, is the point that, if reached, will initiate the automatic closure of existing positions.
What Is a Call Loan Rate? A call loan rate is the short-term interest rate charged by banks on loans extended to broker-dealers. Margin Definition Margin is the money borrowed from a broker to purchase an investment and is the difference between the total value of investment and the loan amount. Partner Links. Margins apply before you can open an account minimum margin , before you borrow initial margin , and to hold on to a position you've purchased maintenance margin.
Leverage is a tool traders can use to purchase stock shares or futures contracts on credit. In essence, they borrow from their firm to make a trade, without the cash to back it up. Equity, in this context, is the value of the holdings in your account including cash minus the amount you borrow to fund a trade.
The two basic margin requirements are known as initial and maintenance margins. The initial margin requirement is the equity needed to enter a position.
Maintenance margin requirements refer to how much equity you must maintain, as compared to the market value of your holdings. Maintenance requirements vary between firms, but they also depend on what type of securities you're trading. Those who make at least four day trades per week are called and have been marked as "pattern day traders" have a unique margin requirement situation. There are also unique rules that govern forex trading. Day traders should ensure that they close out all their trades by the end of the day.
Holding a security overnight could apply different margin standards to the trade, which could result in a margin call. It's common for forex trades to be almost fully margined. In effect, the broker gives you the chance to make trades with money you don't have. The Commodity Futures Trading Commission limits leverage on major currencies to Traders should proceed with extreme caution before placing trades with such high levels of leverage.
In a perfect world, a trader would never have to deal with margin calls. Margin calls only happen when a trade has lost so much money that the exchange or broker wants more money as collateral to allow the trade to go on. If you know what you're doing and manage your trades well enough, you will never allow a trade to become this much of a loser.
Margin calls most often happen to amateur buy-and-hold investors. By failing to get rid of a stock that rapidly falls after purchase, these amateur traders end up having to add more funds to their account, just to maintain a losing position. Savvy traders, on the other hand, know when to cut their losses and liquidate losing positions well before a margin call is required.
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