If you're interested in margin trading, you'll encounter a lot of specialized terminology. Understanding these terms is essential before you start borrowing to invest. This article covers the key concepts, definitions, and regulatory context you'll need to navigate margin accounts with confidence.
What is margin trading?
Margin trading is the practice of borrowing funds from a brokerage to purchase securities, using your existing holdings as collateral for the loan. Instead of paying the full cost of an investment out of pocket, you put up a portion of the purchase price — called the margin requirement — and the brokerage lends you the rest.
This approach allows you to control a larger position than your cash alone would permit, but it also amplifies both potential gains and potential losses.
How margin trading works
To trade on margin, you need to open a margin account with a brokerage. Once approved, the brokerage sets a margin rate for each security — a percentage that determines how much of the purchase price you must provide yourself. The brokerage lends you the remainder.
Here's a simplified example using Canadian dollars. Suppose you want to buy $10,000 worth of a stock listed on the Toronto Stock Exchange (TSX), and the margin rate for that security is 30%. You would need to provide $3,000 of your own funds (the margin requirement), and the brokerage would lend you the remaining $7,000.
If the total value of the stock rises to $12,000, your net equity increases to $5,000 — a gain of $2,000 on a $3,000 investment. However, if it falls to $8,000, your net equity drops to $1,000, meaning you've lost $2,000 of your original $3,000. You also owe interest on the $7,000 you borrowed, regardless of how the investment performs.
Key margin trading terms
Below is a glossary of the most common terms you'll encounter when trading on margin. Each definition is written to help you understand what it means in practice — not just in theory.
Buying power
Funds that are available to you for purchasing securities. This figure is calculated as the sum of your total equity (market value plus your cash balance, which is negative when you've borrowed) minus the margin requirement. Sometimes called "available margin" or "excess margin."
Collateral
The securities held in your margin account are considered collateral (i.e. the securities in your margin account guarantee the loan provided by the broker). If you don't repay the loan in accordance with the terms and conditions you agreed to, the brokerage can sell your securities and collect the amount owed.
Concentration limits
Limits that restrict the amount you can borrow on an individual security. These limits are set by each broker. They're intended to safeguard the brokerage from large losses by preventing you from borrowing too much in an individual security (and thus being overconcentrated).
Debit balance
The total amount you have borrowed from the brokerage.
Fully margined
If your margin account is "fully margined," you currently meet all margin requirements and your available margin is equal to or greater than zero.
Leverage
A mechanism that allows you to control a larger investment position than your available cash would otherwise permit. Leverage is typically expressed as a ratio. For example, if you have $5,000 in cash and borrow $5,000 from your brokerage, you're using 2:1 leverage — controlling $10,000 worth of securities with $5,000 of your own funds.
List of securities eligible for reduced margin (LSERM)
A list of securities that qualify for reduced regulatory margin rates. This list sets out the minimum margin rates brokerages can use for a specific set of securities. It's established by the Canadian Investment Regulatory Organization (CIRO) and published quarterly.
Marginable securities
Securities that can be purchased on margin. Not all securities are eligible — eligibility is determined by regulatory requirements and individual brokerage policies.
Margin call
A request for funds issued by your broker when your account is under margined. When you receive a margin call, you have to deposit additional funds or margin-eligible securities, or close positions in your margin account (i.e. sell your securities to raise your cash balance) to bring your account up to the margin requirement.
Margin interest
The cost of borrowing funds from your brokerage to purchase securities on margin. Margin interest is typically calculated daily on the outstanding debit balance and charged to your account monthly. The rate you pay depends on factors such as prevailing interest rates and the policies of your brokerage.
Margin rate
A rate that determines the amount you need to provide in order to purchase a security. Each security has its own minimum margin rate, which is determined by CIRO and based on various factors. A brokerage can choose to set its own margin rates — called "house margin rates" — but they can't be lower than CIRO's margin rates.
Margin requirement
The dollar amount you need to personally provide to purchase a security. The margin requirement is determined by the margin rate for the security.
Margin status
The current condition of your margin account, reflecting whether it meets the broker's requirements for collateral. Your margin status might show that your account is in good standing or needing immediate action (in a margin call).
Max buying power
The funds that are available to you to buy a specific security — which is what differentiates it from buying power, which is not security-specific. The availability of funds is based on your account's buying power and the margin rate of the security you want to buy.
Net equity
The total value of your margin account. It's calculated as the value of the assets in your account, minus your cash debit balance (the money you owe to your broker). It reflects what you actually own in the account.
Net loan value
The sum of the loan value for each security held in your account, less any amounts owed to your brokerage.
Under equity
If your account is under equity, the value of the securities held in your account as collateral is less than the amount owed to the brokerage. Selling all the assets in your account would not cover the outstanding balance, so your loan has become unsecured and your account will be in a margin call.
Under margin
If your account is under margin, the value of the securities held in your account as collateral has fallen below the minimum value required by your broker. Your account will be in a margin call.
Canadian investment regulatory organization (CIRO)
The Canadian Investment Regulatory Organization (CIRO) is the national self-regulatory body that oversees investment dealers and trading activity on Canada’s debt and equity marketplaces. CIRO plays a central role in margin trading by setting the minimum margin rates that brokerages must follow for individual securities.
Brokerages can impose stricter requirements (house margin rates), but they cannot go below CIRO's minimums. CIRO also publishes and maintains the List of Securities Eligible for Reduced Margin (LSERM) on a quarterly basis. Securities on this list qualify for lower margin rates — a reduced minimum of 30% for client positions (25% for dealer-member inventory positions) — which means you may need to put up less of your own capital to purchase them.
Risks and benefits of margin trading
Margin trading offers potential advantages, but it also carries significant risks. Here are the key considerations:
Amplified gains: borrowing to invest allows you to control a larger position, which means your returns are magnified when your investments increase in value.
Amplified losses: the same leverage that magnifies gains also magnifies losses. A decline in the value of your holdings has a proportionally larger impact on your net equity.
Interest costs: you pay margin interest on the amount you borrow, regardless of how your investments perform. These costs reduce your overall returns.
Margin calls: if the value of your collateral drops below the minimum margin requirement, your broker will issue a margin call. You'll need to deposit additional funds, add eligible securities, or sell holdings to restore your account.
Forced liquidation: if you can't meet a margin call in time, the brokerage may sell securities in your account without your consent to cover the shortfall.
How to know if your margin account is in good standing
Your margin account's status tells you whether you're meeting the minimum collateral requirements set by your broker. There are three key states to be aware of:
Fully margined: your account meets all margin requirements, and your available margin is equal to or greater than zero. No action is needed.
Under margin: the value of your securities has fallen below the minimum collateral required by your broker. Your account is in a margin call, and you'll need to deposit funds, add margin-eligible securities, or sell positions to bring the account back into good standing.
Under equity: the value of your collateral has dropped below your total debit balance. Selling everything in your account would not cover what you owe, which means the loan has become unsecured. This is the most urgent status and triggers a margin call.
To keep your account in good standing, monitor your net equity, debit balance, and margin status regularly — especially during periods of market volatility. Understanding the common mistakes margin traders make can also help you avoid unnecessary risk.
