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What is Margin?

The act of “going on margin” means borrowing money from the custodian of your account, in order to purchase additional securities. Another way of saying this is that you are “leveraging” your account. Investors who go on margin are trying to pump up gains in their account, but doing so means taking the risk of outsized losses if you are wrong. To take an account on margin is not free - the custodian will charge interest for the loan, and will essentially use the assets in your account as collateral. Continue reading...

What is 'buying on margin' and margin trading?

A margin trade is one where the trader uses other securities or cash as collateral, for a transaction in which he or she has not purchased the security outright. The broker acts as a lender. If your broker approves you for a margin account, you have the ability to purchase new securities “on margin” by using your current holdings as collateral, or by depositing 50% (or more depending on the broker) of the market price of the security into the margin account. Continue reading...

What are 'non-marginable' securities?

Some securities, such as penny stocks and IPOs, are prohibited from being purchased on margin or for serving as margin for other purchases. Stocks and other securities that are too volatile to serve as margin collateral - or to be purchased on margin - are called Non-marginable Securities. The Federal Reserve Board has defined certain criteria for determining which securities are non-marginable, and brokers often have their own house rules for traders. Continue reading...

What is Profit Margin?

Profit margin is a profitability ratio that measures, as a percentage, how much a company keeps per sale. Profit margin can be calculated by dividing net income by sales. A higher profit margin means a company keeps high percentage of each dollar sold as profit. For example, a 50% profit margin means that for every dollar earned, a company retains $0.50. It is often helpful for an analyst to look at how a company’s profit margins have changed over time, to measure whether it is becoming more efficient in the sales of goods. Continue reading...

What is Contribution Margin?

Contribution margin measures how efficiently a company can produce a good relative to its variable cost. Goods with high contribution margins are the most profitable. The contribution margin can be helpful in deciding what goods can go on sale and for how much, and it allows management to decipher how to improve efficiency in production while keeping variable costs low. Additionally, if there is a bottleneck in the supply chain for an input that is used to produce two different products, management could use contribution margin to decide which product takes takes priority. Continue reading...

What is Minimum Margin?

Minimum margin is the minimum amount needed to open a margin account. The custodian or broker typically sets the minimum margin, but it cannot be for any less than the $2,000 required by the NYSE and NASD. What is 'Buying on Margin' and Margin Trading? What is a Margin Account? Continue reading...

What is a Margin Account?

A margin account is one in which an investor uses borrowed money to purchase additional securities. An investor is almost always required to use the securities in the account as collateral for the borrowed money. The objective of a margin account is for the investor to magnify gains, but the opposite can also be true, and losses may lead the investor to have to sell securities in the account to cover the loan balance. There’s more upside in a margin account, but there’s more downside too. Continue reading...

What is a Margin Call?

A margin call is a mandatory request by the custodian/broker for the account holder to add equity to the account, either by depositing cash or selling securities to raise cash. When an investor takes an account on margin, the custodian will require that they keep a certain amount of equity/cash in the account to maintenance the borrowed amount. If the account value drops past a certain level, the custodian may require the investor to add equity to the account to cover the margin balance. Continue reading...

What is Operating Margin?

Operating margin is a ratio (expressed as a percentage) that indicates how much a company makes for each dollar of sales. It can be calculated by dividing a company’s operating income by net sales, and generally a company that has a high and consistently improving operating margin is thought to be healthy. Operating margin can be looked at in terms of the overall company, or in a more focused vacuum - such as analyzing the operating margin of a new clothing line or an experimental sales project. Continue reading...

What Does Maintenance Margin Mean?

A maintenance margin is the minimum amount of equity an investor must keep in a brokerage account to cover margin balances. Under the regulatory guidance of NYSE and FINRA, an investor has to have in equity at least 25% of the total market value of the securities in the margin account. Depending on which brokerage firm the account is held, the maintenance margin requirements could be higher. According the the Federal Reserve’s regulation titles “Regulation T,” when a trader buys on margin they must maintain key levels of equity throughout the life of the trade. Continue reading...

What is the Contribution Margin Ratio?

The contribution margin ratio is a financial metric that presents the profit (less variable expenses) as a percentage of net sales. It helps businesses understand the profitability of individual products or the entire business and can be used to make informed decisions about pricing, production, and profitability. However, the contribution margin ratio has limitations and should be considered in conjunction with other financial and non-financial factors when making business decisions. Continue reading...

What is Adjusted Gross Margin?

Adjusted Gross Margin accounts for the cost of maintaining inventory, which regular Gross Margin does not. Gross margin can be calculated offhand as the selling price of a good minus the price paid for the good (cost of goods sold). This is the simplest calculation for profit. The Adjusted Gross Margin takes into account the cost of maintaining an inventory as well, which is a step in the direction of accounting for the expenses of the business operation as a whole. Continue reading...

What is Investment Interest Expense?

IIE is deductible from taxes, and is usually used to deduct the interest paid on a margin loan used to buy taxable securities, when there is a gain to offset. Investment interest expense is the term for interest which has been paid in order to hold an investment position. It comes into play when filing taxes. An individual can list interest expenses on a Form 1040. The most common place to incur an interest expense when investing is through the use of margin in an investment account. Continue reading...

What is short selling?

If you expect that a security will depreciate, you can sell it on the market without owning it, and, if your expectations prove to be right, you can buy it for less before “covering” your position – keeping the difference in profit. Short selling is done with the help of a brokerage/custodian, who will lend you the security so that you can sell it, and they will charge interest on the loaned amount until you actually purchase the security to “cover” your loan. Continue reading...

What are index futures?

Index futures are futures contracts written on an index in which a large position can be held with a relatively small margin requirement. Index futures can be used for hedging or speculation. A "good faith" initial margin deposit (also called a performance bond) of a fraction of the contract size is all that is required to hold a substantial position, with a notional value worth significantly more than the amount invested. Continue reading...

What does Leverage Mean?

Leverage is the use of borrowed capital or debt to try and increase the potential return of an investment. An individual might leverage an investment account by going on margin to purchase additional securities, whereas the amount of debt used to finance a company’s assets is considered to be that company’s level of leverage. A firm with significantly more debt than equity is considered to be highly leveraged. Continue reading...

What is buying power?

With regards to Margin Trading, ‘Buying Power’ is a term used to describe how much additional leverage you have given the excess equity in your account. When your broker or custodian authorizes buying on margin, the purchasing power of your assets can become substantial. Instead of just owning $10,000 worth of stock, you might be able to leverage that to buy $10,000 more, therefore having $20,000 of long exposure even though you only have $10,000. Continue reading...

What is Cash Collateral?

Cash collateral is liquid cash and cash equivalents designated as collateral for loans and debts of various sorts. One frequently used example of cash collateral is cash used in short selling of securities in a brokerage account. While securities equal to significantly more than the required cash margin can be substituted for cash, the most cost-effective and least risky way to maintain margin requirements is with cash and cash equivalents. Continue reading...

What is a short position in options trading?

Taking a short position is selling a security that you don’t own because you anticipate that its value is set to fall. In simple terms, an investor that takes a short position is betting against it. “Shorting” is the opposite of being “long” in a security, where being “long” means to actually own it and to wait for it to appreciate. When you contact your broker or custodian to take a short position on a security, you essentially sell shares you don’t own, and then after a period, you have to return those shares to the custodian. Continue reading...

What is Collateral?

Collateral is an asset/property that a borrower commits to a lender in exchange for a loan, which will be forfeited if the borrower defaults. A loan that has collateral attached to it will generally carry a more favorable interest rate, but that is not necessarily always the case. Some examples of collateral are a house when you take out a mortgage, your car when you take out an auto loan, or the stocks in your portfolio if you take your account on margin. Continue reading...

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