What is Margin? Understanding how collateral works

Basic Concept of Margin

When you start trading with leverage, “margin is” the amount of money you need to have in your account. It is not a fee or cost, but a security deposit that the broker holds to ensure you can trade safely.

When you open a new position, a percentage of your account funds will be reserved as additional margin. For example, if you want to control a position worth $100,000, the broker might only set aside $1,000. This means you control a large position with a small amount of capital.

How Margin Works

The reserved margin will be locked in as long as your position remains open. When you close the trade, the funds will be released back into your account for future trading. This is how brokers prevent potential losses.

The required margin level depends on:

• The current price of the currency pair
• The trading volume
• The leverage ratio you choose

How to Calculate Initial Margin

Margin = Current Contract Value × Margin Ratio (%)

Imagine this scenario: if you use 200:1 leverage (which equals a 0.5% margin requirement) and open a mini lot position worth $10,000, you do not need to pay the full $10,000.

You only need to have:

• $10,000 × 0.5% = $50

This demonstrates the power of leverage in trading—allowing you to control large positions with a small amount of capital.

What is the Maintenance Margin Ratio?

Maintenance Margin or MM is the minimum level of equity you must maintain to keep your position open. It is also called “Free Margin.”

You must keep the equity at or above 50% (or as specified by the broker) of the initial margin. If your funds fall below this level, the broker has the right to close your position immediately.

How to Calculate Maintenance Margin

Maintenance Margin = Current Contract Value × MM Ratio (%)

MM Ratio (%) = Margin Ratio (%) × 50%

Suppose you paid an initial margin of $1,000. Your equity must not fall below $500 at any time.

If your trading starts to deteriorate, your initial margin may no longer be sufficient. In this situation, the broker will send a “Margin Call,” meaning you need to deposit additional funds into your account.

For example: if your trading loss reduces your equity to $400 , you will need to deposit more $100 to bring your account back to the required Maintenance Margin level.

Important Things to Remember

Initial Margin: The security deposit required to open a trading position. For example, $50 to control a $10,000 position.

Maintenance Margin: The minimum amount of equity needed to keep the position open. Usually 50% of the initial margin.

Relationship with Leverage: Margin and leverage are two sides of the same coin. Both amplify profits and losses. In case of losses, the broker can forcibly close your position if you do not meet the Maintenance Margin requirements.