Margin is the cash or eligible collateral you must lodge with a broker or clearing house to open and keep a leveraged position. It is a security deposit that covers potential losses so you can trade exposure larger than your cash balance.
Margin is not the same as profit margin used in company accounts, and it is not a fee. It sits alongside leverage: the more leverage you use, the smaller the margin you post for a given position, and the faster your gains and losses move.
How trading on margin works day to day
When you place a trade on margin, your provider calculates a required amount based on the instrument and your position size. That amount is set aside from your free cash or other approved collateral, such as Treasury bills or certain stocks that are subject to haircuts. The position then marks to market, which means unrealised profit increases your free equity and losses reduce it.
With derivatives like futures and some crypto perpetuals, margin is a performance bond rather than a loan. You are not borrowing the remaining notional. With margin loans on shares or CFDs, you are effectively borrowing the difference between your cash and the position value, and you will usually pay financing costs while the position is open. Exact behaviour varies by provider and product.
Initial, maintenance and variation margin
Initial margin is the amount needed to open a position. Think of it as your starting buffer. If a broker quotes 10 percent margin for a trade, you need 10 percent of the position value up front.
Maintenance margin is the minimum equity you must keep to hold the position. If losses push your equity below this threshold, you get a margin call asking for more funds or a reduction in exposure.
Variation margin is the daily cash flow that realises gains or losses on exchange-traded derivatives. If your futures position loses value, cash leaves your account to the clearing house. If it gains, cash arrives. This daily settlement keeps the performance bond adequate as prices move.
If you do not meet a margin call within the time allowed, your broker may close positions to bring risk back within limits. Liquidations can happen quickly in fast markets.
Futures margin vs margin loans on shares and CFDs
In a futures contract, margin is risk collateral. You post initial margin and then pay or receive variation margin as the contract is marked to market, often daily. There is no interest charge for borrowing the notional because you have not borrowed it. Exchanges and clearing houses set base margin levels that brokers can raise for clients they deem higher risk.
In a share margin account or a CFD, your provider finances part of the position. You put up initial margin and the provider lends the rest, charging financing on the borrowed amount or the full notional depending on the product mechanics. For short selling shares, margin also covers borrow availability, buy-in risk and potential dividends owed.
Crypto platforms may use similar models, but the labels can differ and liquidation engines can be more aggressive. Always check the specific rules where you trade, including how interest, funding rates and liquidation cascades work.
Cross margin, isolated margin and netting
Cross margin pools collateral at the account level. Profits on one position can offset losses on another, which can reduce the chance of a margin call but also links your trades together. A sudden loss in one instrument can endanger otherwise comfortable positions in others.
Isolated margin fences off collateral for a single position or product group. If that trade goes wrong, the damage is limited to its ring-fenced margin. Many crypto derivatives venues let you choose cross or isolated per position. Brokers for equities and CFDs often use account-level cross margin with product-specific limits.
Some providers also net positions in the same instrument and direction. Others let you keep separate longs and shorts that do not offset, often via a setting similar to a hedge or force-open mode. Netting rules change P&L, margin and stop-out behaviour, so read your platform’s handbook.
What drives margin requirements and a quick estimate
Margin is a function of risk. Requirements usually rise when:
- Price volatility increases or liquidity thins.
- Your position size is large relative to market depth.
- The instrument has a big contract multiplier or lot size.
- Concentration in correlated positions grows.
- For options, the position carries large gamma or vega exposure.
For a quick back-of-the-envelope check, multiply the position’s notional value by the quoted margin rate. A £50,000 position at 10 percent margin needs roughly £5,000. The same idea can be inverted using a leverage multiple: at 5 times leverage, required margin is notional divided by 5.
In futures, exchanges use risk models that simulate moves across scenarios, then set initial and maintenance levels to cover a defined confidence interval. Brokers may apply overlays for client risk. In securities margin accounts, regulators and firms publish schedules with base rates and additional buffers. Collateral haircuts reduce the lending value of anything other than cash.
Example: a rising then falling market on margin
Suppose you buy one equity index futures contract. Each point is worth £10, and the index is at 5,000, so your notional exposure is £50,000. Initial margin is set at £5,500 and maintenance at £4,000.
Day 1: the index rises to 5,040. You are up 40 points, so £400. Variation margin credits £400 to your account and your equity rises to £5,900.
Day 2: the index drops to 4,980. You lose 60 points, so £600. Your equity falls to £5,300. You are still above maintenance, no call.
Day 3: a sharp sell-off takes the index to 4,930. You lose 50 points, so £500. Equity drops to £4,800. Still above maintenance but getting closer.
Day 4: the market gaps down to 4,880. You lose another 50 points, so £500. Equity is now £4,300. One more poor move could take you below maintenance.
Day 5: an intraday slide to 4,870 takes another 10 points, or £100, off your equity, which falls to £4,200. You are still above £4,000, but any further loss will trigger a margin call. If it falls to 4,860, you would be below maintenance. Your broker would then ask you to top up to the initial level or reduce the position. If you cannot or do not, the position may be closed.
The same logic applies to leveraged share or CFD trades, with two differences: you may pay financing while the position is open, and P&L usually remains unrealised until you close the trade rather than being settled to cash daily. But if losses eat into equity so that you breach maintenance, you will still face a call or an automated close-out.
Risks, costs and common confusions
Margin accelerates outcomes. It lets you use capital efficiently, but small price moves can have large effects on account equity. Keep a cash buffer above maintenance, stress test what happens if the market moves against you by typical daily ranges, and remember that rules and liquidation speeds vary by provider and product.
Costs matter. Financing rates, borrow fees for shorts, commissions and funding payments on perpetuals all change your break-even. None of these charges alter the margin you must post, but they affect how long your buffer lasts under pressure.
Finally, do not confuse trading margin with accounting margins such as gross margin or operating margin. Those measure profitability. Trading margin is collateral. They live in different parts of finance and behave very differently.