What is excess trade margin?
Excess trading margin refers to the funds left in a margin trading account that are available for trading. In other words, they are the funds left, presumably after a trader has taken their positions for the current trading day or session. These funds can be used to purchase a new position or increase an existing one.
- Excess trading margin refers to the funds in a margin account that are currently available for trading.
- Since margin accounts use leverage, excess trading margin does not reflect the actual cash left in the account, but rather the amount that is available to borrow.
- Excess trading margin is also known as free margin, usable margin, or available margin, but should not be confused with excess margin.
Understanding Excess Margin
Because margin trading accounts provide a leveraged amount of funds to invest with, excess trading margin does not reflect the actual cash left in the account, but rather the amount that is available to borrow.
Excess trading margin is also known as free margin, usable margin, or available margin. However, excess trading margin should not be confused with excess margin, although the terms sound the same. Excess margin is the value of an account, whether in cash or securities, that is above the legal minimum required for a margin account or the maintenance requirement of the brokerage firm holding the account.
A margin account gives traders or investors the ability to buy beyond the account’s actual cash value through leverage, that is, by borrowing. Let’s say, for example, an investor has a margin trading account with a leverage of 10: 1. That means they could have $ 10,000 of cash in that account and be able to trade up to a value of $ 100,000.
Now, let’s say you take some positions (that is, you place orders to invest) in some stocks, worth $ 60,000. Your account now has an excess trade margin of $ 40,000 ($ 100,000 – $ 60,000). In other words, $ 40,000 is the investor’s available margin amount, that is, the amount of borrowed funds left after opening his position. The investor can use that $ 40,000 to carry out more trades, take new positions or increase current ones.
Dangers of excess trading margin
Of course, for the sake of clarity, this is a somewhat simplified example. It does not take into account some facts about margin accounts. Most brokerages that offer such accounts establish requirements for the protection of an investor and your own: minimum amounts (generally, a percentage of the market value of your holdings) that you must keep in the account, or maximum amounts that you can ask for. rendered by operation.
There are also government and industry regulations: the Federal Reserve Board (FRB), for example, prohibits buying more than 50% of the purchase price of a security on margin. The Financial Industry Regulatory Authority (FINRA) requires margin account holders to maintain minimum levels of capital in their accounts at all times, or they risk having their trading privileges suspended.
For all these reasons, an investor must be careful. While margin allows traders and investors the opportunity to make a profit, it also offers the potential for catastrophic losses. The margin, or money borrowed, must be repaid (usually at the end of the trading day) and if the trader has guessed incorrectly, he may end up owing a huge sum. A trader shouldn’t even think about using all his excess trading margin, his purchasing power, so to speak, simply because it is available.