Definition
Margin is the collateral a trader must deposit with a broker or clearing house to open and maintain a leveraged position, such as a futures contract, a margin loan or a short sale. It is a performance deposit against potential losses, not a fee and not the maximum amount that can be lost.
How it works
Initial margin is required to open a position, and maintenance margin is the minimum account equity needed to keep it open. Futures add variation margin, which settles gains and losses daily. For securities, margin financing lets a broker lend part of the purchase cost, with the holdings as collateral and interest charged.
If account equity falls below the maintenance level, the broker issues a margin call to add funds or cut exposure, and may liquidate positions without waiting. Because losses are not limited to the margin posted, a position can lose more than the deposit.
Formula / convention
Margin ratio = Margin deposit ÷ Notional position value; Account equity = Cash deposited + Unrealized profit or loss; a margin call follows when account equity falls below the maintenance margin
Illustrative example
A fictional futures contract has a notional value of HK$1,000,000, an initial margin of HK$80,000 (8%) and a maintenance margin of HK$64,000. A long position that loses HK$20,000 cuts account equity from HK$80,000 to HK$60,000, below the maintenance level, which triggers a margin call. If the contract keeps falling, losses can exceed the original HK$80,000 deposit.
What to watch for
Margin is only a deposit and never the cap on loss: requirements can rise at short notice, and a forced liquidation can lock in losses and leave a debt to the broker.