Trading Margin Excess What it Means How it Works Dangers
Trading Margin Excess: What it Means, How it Works, Dangers
What Is Trading Margin Excess?
Trading margin excess refers to the funds remaining in a margin trading account that are available to trade with. They are the funds left over after a trader has taken out their positions for the day or the current trading session. These funds can be put toward the purchase of a new position or the increase of an existing one.
Key Takeaways
– Trading margin excess refers to the funds in a margin account that are currently available to trade with.
– Since margin accounts utilize leverage, the trading margin excess reflects the amount left available to borrow, not the actual cash remaining in the account.
– Trading margin excess is also referred to as free margin, usable margin, or available margin but should not be confused with excess margin.
Understanding Trading Margin Excess
Margin trading accounts provide a leveraged amount of funds with which to invest. The trading margin excess reflects the amount left available to borrow, not the actual cash remaining in the account.
Trading margin excess is also referred to as free margin, usable margin, or available margin. However, it should not be confused with excess margin, which is the value of an account—in either cash or securities—that is above the legal minimum required for a margin account or the maintenance requirement of the brokerage firm.
A margin account allows traders or investors to invest beyond the actual cash value of the account through leverage. For example, an investor with a 10:1 leverage could have $10,000 cash in the account and trade up to a value of $100,000.
If the investor takes positions worth $60,000, their account will have a trading margin excess of $40,000 ($100,000 – $60,000). This $40,000 is the investor’s available margin, which can be used to make more trades, take out new positions, or augment existing ones.
Dangers of Trading Margin Excess
It is important to remember that there are requirements and regulations associated with margin accounts. Brokerages set requirements for investor and account protection, such as maintaining minimum amounts or limiting the borrowing per trade. Government and industry regulations also exist, such as the prohibition on buying more than 50% of a security’s purchase price on margin.
Therefore, investors must be careful when utilizing margin. While it offers the opportunity to profit, it also carries the potential for catastrophic losses. The borrowed money has to be repaid (usually by the end of the trading day), and incorrect predictions can result in owing a significant sum. Traders should not utilize all of their trading margin excess simply because it is available.
