A Starter Guide to Margin Trading

October 4, 2024 • Beginner

Interested in trading margin? What you need to know about the different types of margin trading for stocks, options, futures, and forex and their unique risks and benefits.

Margin is a tool traders and investors can use to increase their buying power. For stocks, it can mean using eligible securities in your portfolio as collateral for a loan from your broker that you can use to buy more securities. For products like futures and forex, margin is the initial amount of funds required to enter a position—typically a fraction of the position's total value. This article covers the basics of the different types of margin and links to a number of resources for learning more.

Margin works differently depending on the account type or market. For example, there's a big difference in how margin is calculated in a stock brokerage account compared to a forex or futures account. Each margin type can be used by a different category of investor and can be used to pursue their specific objective.


Reg T margin securities	Portfolio margin securities	Futures margin	Forex margin
Who's it for? Investors who want to buy more shares with the same amount of capital or want to use their equity for collateral on a loan. Reg T margin typically involves a strategy-based margin.	Who's it for? Investors with account values greater than $125,000 who want to increase the amount of capital available for investing. Unlike Reg T, portfolio margin typically involves a risk-based margin.	Who's it for? Futures traders or investors seeking to hedge portfolios with futures contracts to potentially offset possible security losses elsewhere in their portfolio.	Who's it for? Traders seeking to trade currency pairs.
Pros Buy more shares with the same capital. Potential for higher returns. Use portfolio holdings as collateral for loans.	Pros Potential for higher returns. Lower margin requirements compared to Reg T margin. Long options are marginable and can be used as collateral for other marginable positions. No difference between initial and maintenance margins.	Pros Ability to control large positions with a fraction of the capital. Potential for higher returns. Ability to trade many different markets (crude oil, gold, bonds, equities, etc.)	Pros Trading 24 hours, six days per week. Ability to control large positions with a fraction of the capital.
Cons Borrowed money is subject to interest charges. Higher risk of loss compared to non-margined stock positions. Potential for margin calls if the account falls below maintenance margin levels.	Cons Borrowed money is subject to interest charges. Higher risk of loss compared to non-margined stock positions. Potential for margin calls if the account falls below maintenance margin levels. Requires a larger account size to open.	Cons High risk of loss on relatively small market movements. Not all futures contracts are actively traded or liquid. Requires a futures trading account.	Cons High risk of loss on relatively small market movements. Can involve a steep learning curve. Requires a forex account.

Getting started with margin

It's important to understand the way margin works before diving in. The Federal Reserve's Regulation T, or Reg T, governs how much an investor can borrow using margin in a brokerage account. Your broker can also set their own margin requirements, but the amount can't be less than the typical 50% required under Reg T. This type of margin is often used to buy stock or to use portfolio holdings as collateral for a loan.

Margin and stocks

Once the margin account is open and operational, an investor can purchase stock by paying the required margin and borrowing the balance from the broker. The borrowed money is subject to interest, which accrues daily, and—in most cases—allows investors to buy twice as many shares with the same amount of capital.

Ready to learn more about the risks and benefits of a Reg T margin account?

Start with these introductory articles: Margin: How Does It Work?, What to Know About Margin, and Basics of Buying on Margin: What's Margin Trading?
Once you have a handle on the basics, consider 3 Ways to Use Margin and Leverage
From there, you might want to learn How Traders Can Apply for Margin

Margin calls

If a margined stock position falls below a certain threshold (known as the maintenance margin level), the broker will likely issue a margin call. Not sure when a margin call might happen?

Here's how to prepare for Your First Margin Call
And How to Handle Margin Calls

Leveraging assets

Investors who have built up their portfolios can sometimes use their assets as collateral. This means borrowing money and paying interest on the loan until it's repaid.

Here's a video that shows 3 Ways to Borrow Against Your Assets
And further reading on Leveraging Your Assets to Manage Your Wealth

Beyond the basics

Short selling, day trading, and options strategies have varying margin requirements. For example, buying puts and calls requires paying the full options premium; margin is not involved. However, certain options strategies and short selling stock require margin accounts.

A primer on short selling

Short selling involves borrowing shares from your broker, selling them in the market in anticipation of a move lower in price, buying the stock back later (ideally at a lower price), then returning shares to the lender. Keep in mind, this strategy involves potentially unlimited risk.

Short Selling: The Risks and Rewards covers the basics.
And watch this video to see what might motivate a short sale: Short Selling: Can Your Profit from a Falling Stock?

Know your options

Options are versatile investments that can offer potential opportunities in up, down, or sideways-trending markets. Securities and index options strategies can also have various levels of risk and must be done in an account approved for options trading. Remember: options are not suitable for all investors.

Check out this video to see how options work and their potential risks: Investing Basics: Options
And how the collar options strategy can be used to help protect a stock that was bought with or without margin: Collaring Your Stock for Temporary Protection
To see an example of an options strategy that requires margin, read How Could Vertical Spreads Help Your Strategy
Also, there are times an options strategy can result in an unintended margin call, which is explained in the Options Exercise, Assignment, and More: A Beginner's Guide article.

Pattern day trader and margin

Day trading involves the purchasing and selling (or short selling and purchasing) of the same security on a single day within a margin account. If you make four or more day trades over the course of five business days, and those trades account for more than 6% of your account activity over that time period, your margin account will be flagged as a pattern day trader account.

If you want to know if PDT rules apply to your trading, check out this video: The Pattern Day Trading Rule Explained
And this article highlights some of the risks and opportunities: What Is Day Trading? Rules, Risk, and More

Master class

While the 50% Reg T margin requirement is relatively straightforward, other types of margin are a bit more complex. Portfolio margin, for example, requires a theoretical pricing model.

Portfolio margin

First introduced in 2007, portfolio margin is available to investors who meet minimum qualification requirements (at Schwab, each account must have full options trading approval and an initial value of at least $125,000). The amount of margin required for an investment is calculated based on correlations of different assets in the portfolio margin account.

Before you consider applying for portfolio margin, you might want to see how it compares to Reg T margin in this video Portfolio Margin Explained and the article Portfolio Margin vs. Regulation T Margin
And here's another helpful explainer on the topic: Understanding Portfolio Margin
Portfolio margin can have additional advantages for option traders, which are discussed in the article Option Traders: How Portfolio Margin Works

Futures

Margin is a feature of futures. That is, futures always involve margin, but it works quite a bit different than Reg T and portfolio margin. Margin is the amount of funds required to enter a futures position, typically a fraction of the total contract value.

Here's an explanation of the key difference: Trading Futures vs. Stocks: What's the Difference
For a deeper dive into futures margin, consider reading this article How Futures Margin Works and watching this video Understanding Futures Margin

Forex

Forex is the market where currency pairs trade; minimum margin requirements are set by the NFA (National Futures Association), but the margin required to buy and sell can vary by broker. It's usually a small percentage of the total size of the forex position.

If you have no prior experience trading currencies, consider starting your learning with Investing Basics: Forex
From there, you can find more information about how margin works here: Understanding Forex Margin

What's next?

If you want more information about margin, check out the Margin page on Insights & Education. Margin can have several different meanings and many different applications in the financial world. While it can increase potential gains, margin can also magnify potential losses. To see how margin works in real time, traders can begin practice trading stocks, futures, and forex with paperMoney® on the thinkorswim® platform.

How do margin loans work at Schwab?

Learn more

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Trading Margin Portfolio Management

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Investing involves risk, including loss of principal.

Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Please read the Options Disclosure Document titled "Characteristics and Risks of Standardized Options" before considering any option transaction.

Supporting documentation for any claims or statistical information is available upon request.

Futures, and Futures options trading involves substantial risk and is not suitable for all investors. Please read the Risk Disclosure Statement for Futures and Options prior to trading futures products.

Forex trading involves leverage, carries a substantial level of risk, and is not suitable for all investors. Please read the Risk Disclosure for Forex:  https://www.schwab.com/resource/forex-risk-disclosure-statement.

Futures and forex accounts are not protected by the Securities Investor Protection Corporation (SIPC). Forex accounts do not receive a preference in any bankruptcy proceeding pursuant to Part 190 of the CFTC’s regulations.

Read additional CFTC and NFA futures and forex public disclosures for Charles Schwab Futures and Forex LLC.

Futures, futures options, and forex trading services provided by Charles Schwab Futures and Forex LLC. Trading privileges subject to review and approval. Not all clients will qualify. Forex accounts are not available to residents of Ohio or Arizona.

Charles Schwab Futures and Forex LLC is a CFTC-registered Futures Commission Merchant and NFA Forex Dealer Member.

Charles Schwab Futures and Forex LLC (NFA Member) and Charles Schwab & Co., Inc. (Member SIPC) are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation.

Short selling is an advanced trading strategy involving potentially unlimited risks and must be done in a margin account. Margin trading increases your level of market risk. For more information, please refer to your account agreement and the Margin Risk Disclosure Statement.

When considering a margin loan, you should determine how the use of margin fits your own investment philosophy. Because of the risks involved, it is important that you fully understand the rules and requirements involved in trading securities on margin. Margin trading increases your level of market risk. ur downside is not limited to the collateral value in your margin account. ab may initiate the sale of any securities in your account, without contacting you, to meet a margin call. Sch b may increase its "house" maintenance margin requirements at any time and is not required to provide you with advance written notice. You e not entitled to an extension of time on a margin call.

Day trading can be extremely risky and is generally not appropriate for those with limited resources, limited investment or trading experience, and low risk tolerance.

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