Margin Trading
Trading on margin means borrowing funds from a broker to purchase securities. This enables you to take positions larger than your own available funds, which can magnify both profits and losses. While potential gains may increase, your losses can also exceed your initial investment. Because borrowed funds are used, you remain responsible for repaying the loan plus any applicable interest.
Trading on margin is suitable only for experienced investors with a high risk tolerance. You may lose more than your initial investment, and losses can occur quickly.
Pros and cons of a margin account
- A margin account provides the ability to invest in leveraged products such as turbos, sprinters and speeders.*
- The use of margin allows investors to achieve meaningful results even with less volatile products.*
- A margin account allows investors to sell (write) options.*
- A margin account allows investors to go short on stocks.*
- Investors can trade futures with a margin account.*
* Provided that your account balance and trading experience permits this.
- In margin trading, both profits and losses are magnified, meaning you can lose more than your personal investment.
- Failure to meet maintenance margin can result in forced liquidations of positions in your investment portfolio.
- Like borrowing money, trading on margin is not without cost. You pay debit interest on the borrowed amount.
- Using leverage can increase the complexity of managing your investment portfolio.
- Your loss may be greater than your deposit.
A simple example
You currently possess €3,000 in cash and intend to acquire €10,000 worth of stocks. To achieve this, you have two options:
- Option one involves transferring additional funds to your account, waiting for their processing, and then proceeding with the stock purchase.
- Alternatively, you can choose to allow your broker to use your existing cash as collateral, thus granting you access to the necessary additional funds for the €10,000 purchase. In this case, the broker will request a collateral, also known as an initial margin, of €3,000. The remaining amount of €7,000 is lent to you by the broker. On the €7,000 you borrowed you pay debit interest, calculated on the same day.
This example is simplified. It excludes transaction costs, commissions, financing costs (debit interest), and tax implications. Actual results may differ. The example serves only to illustrate the mechanics of leverage.
Margin trading allows you to take on greater obligations without having the corresponding cash on hand.
Now let’s assume the stock you bought worth €10,000 goes up by 1% and is now worth €10,100. The gain of €100 is all yours. What does this mean for your equity? It rises from €3,000 to €3,100. This is an increase of (€100/€3000) = 3.33% although the stock price only increased by 1%.
Now, consider a scenario where the stock you purchased for €10,000 decreases by 1% and is now worth €9,900. The loss of €100 is entirely on you. What does this mean for your equity? It drops from €3,000 to €2,900. This is a decrease of (€100/€3,000) = 3.33%, even though the stock price only decreased by 1%.
| Trading with only your own funds | Trading on Margin | |
|---|---|---|
| Initial Deposit | €3,000 | €3,000 |
| Available to invest | €3,000 | €10,000 |
| Purchase | €3,000 | €10,000 |
| Remaining available funds | €0 | €0 |
| Profit/Loss from Investment (1% increase/decrease) | (-) €30 | (-) €100 |
| Return on your capital | (-) 1.00% | (-) 3.33% |
Note: This is another simplified example. It excludes transaction costs, commissions, financing costs (debit interest), and tax implications. Actual results may differ.
How does trading on margin work?
A margin account allows you to trade using additional funds by providing your securities and cash as collateral. The required collateral is referred to as the Initial Margin. By leveraging your securities as collateral, you can access additional buying power (or funds) for your trading activities. In most cases, you will only need to provide a fraction of the total trade value as the Initial Margin.
While the payment for securities will be processed for the entire sum, a margin account will allow you to hold positions using leverage and/or negative cash balances as long as it does not violate margin requirements. A negative cash balance indicates that you are borrowing funds, and you will pay debit interest on that balance.
The margin account must maintain a minimum amount of equity, known as the Maintenance Margin, to hold open positions. In practice, this means the account’s Excess Liquidity must remain positive. If Excess Liquidity becomes negative, the account no longer meets the minimum maintenance margin requirement, and positions may be liquidated automatically to restore margin compliance.
For a clear overview of these key margin values and how they are calculated, see the table below:
| Term | Description |
|---|---|
| Initial Margin | The collateral required to enter into your current positions. Requirements vary per instrument and position size. Learn more. |
| Maintenance Margin | The minimum equity required to retain your positions and carry them to the next trading day(s). |
| Equity With Loan | This value forms the basis for determining whether you have sufficient assets to open or maintain margin positions. It is the total value of eligible assets in your account, calculated as cash + stock value + bond value + mutual fund value + European and Asian options value (excluding U.S. securities options, futures options, and cash held in the futures segment). If this value falls below EUR 2,000 in a margin account, the account will revert to functioning as a cash account. For cash accounts, this value represents settled cash only. |
| Available Funds | The maximum funds available to open new positions. Calculation: Equity with Loan Value – Current Initial Margin |
| Excess Liquidity | The buffer by which your portfolio value can decrease before positions may be automatically liquidated. If your account falls below this level, positions may be closed without prior notice. Calculation: Equity with Loan Value – Current Maintenance Margin |
Note: For a full breakdown of your portfolio and account values, visit our Portfolio and Account Values page.
Any margin account whose value decreases below €2,000 (or equivalent) will automatically be considered a cash account. Thus, if you have a margin account, but the value falls below €2,000, you will no longer be able to trade on margin, for example, when writing options.
See your margin impact
Before submitting an order, you can review how it will affect your margin requirements. This feature helps you understand the additional obligations and risks of a new position.
Review Margin Impact in LYNX+
The initial margin changes only by a fraction of the purchase amount as indicated by the Change in the section about Initial Margin.
Review Margin Impact in TWS
Right-click a pending order and select Check Margin Impact from the menu.
The order preview window shows the impact of the order on your account. The column Change in the Balances section indicates how margin requirements will change post-trade.
Review Margin Impact in LYNX Trading App
To view the impact on the margin, click on Preview in the bottom right corner. After this, the margin display for the current position opens up.
Margin impact calculations are estimates. They may change due to market movements or updated exchange/broker requirements. Viewing margin impact does not guarantee that you will avoid margin calls or forced liquidations. Always ensure you have sufficient liquidity to cover potential losses and financing costs.
Risk-based Margin Overview
Risk-based margin evaluates the risks of your entire portfolio to determine margin requirements. In some cases, this approach can allow higher leverage, but it also means that losses across correlated products may affect your portfolio more strongly.
For equities, ETFs and exchange-traded funds, the margin requirement is usually 15% to 100% of the value of the position. The margin requirement for short positions ranges between 30% and 100% of their value.
| Long options |
| up to 100% of the premium paid will be required as margin. However, depending on the contract’s duration and liquidity, IB may impose stricter requirements. |
| Short call |
| No margin is required if it is a covered call option. If the short call option is not covered, the system performs a simulation of various scenarios and determines the required margin based on the maximum possible loss. |
| Short put |
| This option strategy requires at most the margin required for the allocation of the put. For example: a stock from company A has a value of 100 USD. If a margin of 50% is required for the stock, a margin of 5,000 USD is required for a position of 100 stocks. Therefore, if you sell a put, the maximum required margin is 5,000 USD, which is the same amount required for buying 100 stocks. |
| Credit spreads |
| For credit spreads, at most the difference between the two strike prices multiplied by the value of the underlying asset, minus the value of the premium received for this credit spread, is required as margin. Let’s take a 100/95 bull put spread as an example. This is a credit spread where the 100 put is sold and the 95 put is bought, resulting in the seller receiving a premium (credit). Assuming you receive $2.50, or a total of $250 ($2.50 * 100 shares per contract), the calculation of the required margin would be as follows: 5 USD (difference between the two strikes) * 100 (per contract) = 500 USD. 500 USD – 250 USD (received bonus) = 250 USD The maximum margin for this position is therefore $250 USD. |
| Underlying | Exchange BELFOX | Intraday Initial 1 | Intraday Maintenance 1 | Overnight Maintenance | Product description |
|---|---|---|---|---|---|
| BFX | BELFOX | 8730.17 | N/A | 6984.13 | BEL 20 Index |
| 10Y | CBOT | 700 | N/A | 560 | 10 Year Micro Treasury Yield |
| 2YY | CBOT | 1399.04 | N/A | 1119.23 | 2 Year Micro Treasury Yield |
| 30Y | CBOT | 818.228 | N/A | 654.583 | 30 Year Micro Treasury Yield |
| 5YY | CBOT | 1307.49 | N/A | 1045.99 | 5 Year Micro Treasury Yield |
| AIGCI | CBOT | 1391.36 | N/A | 1113.09 | Bloomberg Commodity Index |
| AC | CBOT | 6125 | N/A | 4900 | Ethanol -CME |
| KE | CBOT | 5740.37 | N/A | 4592.29 | Hard Red Winter Wheat -KCBOT- |
| MYM | CBOT | 693.588 | 603.12 | 861.6 | Micro E-Mini Dow Jones Industrial Average Index |
| DJUSRE | CBOT | 4849.31 | N/A | 3879.45 | Dow Jones US Real Estate Index |
| TN | CBOT | 3928.78 | N/A | 3143.02 | Ultra 10-Year US Treasury Note |
| TWE | CBOT | 6379.1 | N/A | 5103.28 | 20-Year U.S. Treasury Bond |
| UB | CBOT | 8125 | N/A | 6500 | Ultra Treasury Bond |
| YC | CBOT | 607.545 | N/A | 486.032 | Mini Sized Corn Futures |
| YK | CBOT | 1270.46 | N/A | 1016.36 | Mini Sized Soybean Futures |
| YW | CBOT | 1004.49 | N/A | 803.591 | Mini Sized Wheat Fu |
The European Securities and Markets Authority (ESMA) has issued new rules for trading CFDs for retail investors, effective from 1 August 2018. The AFM and other national regulatory authorities have implemented the ESMA regulations. This section will examine these new regulations and their implementation. These regulations do not affect professional clients.
The new laws and regulations require you to use a multiple account structure with a separate CFD segment. You are not allowed to use securities in your account as collateral for your CFD positions. We have included a separate CFD segment with free credit in your account to comply with these requirements. You can check this in the account window of the Trader Workstation (TWS) and the LYNX Trading App. Below, we explain the account window and margin requirements for CFD trading.
Options and structured products generally require an initial margin of 100% of the market value. In some cases, this may deviate due to risk-based margin calculation.
The margin requirements for spot gold (XAUUSD) and spot silver (XAGUSD) are as follows:
The calculation of margin in theory
Interactive Brokers uses a risk-based model called Portfolio Margin to determine margin requirements based on historical volatility. There are different calculation methods depending on the product, two of which we explain here:
Theoretical Intermarket Margin System (TIMS) & Singleton Margin Method
Both are mathematical methods to simulate various scenarios for your portfolio and calculate the risks of options and futures:
- TIMS scans your entire portfolio to analyze risks and simulates the two largest positions at ± 30% and all others at ± 5% to examine the risk of low diversification. The calculation also considers the impact of extreme price fluctuations and high concentration of risk. Therefore, changes in implied volatility of options, large positions, and remaining days until expiry have an impact, too. Please be aware that the initial margin requirement is usually higher than the minimum maintenance margin requirement.
- In contrast, the Singleton Margin Method calculates the margin requirements for small-cap stocks with market capitalization of less than $500 million. It enables the simulation of price fluctuations, with an increase of 30% and a decrease of 25%. The system selects the scenario with the highest possible loss and applies it as a requirement for your portfolio. Margin requirements for stocks typically range from 15-30% of the market value depending on the calculation.
These calculation methods are technical and may change without notice. They are used to assess potential risks but cannot predict all market conditions.
SPAN
The Chicago Mercantile Exchange (CME) developed SPAN as a risk-based method for calculating margin requirements for futures and futures options. Then, test your portfolio under hypothetical scenarios to examine price changes and the implied volatility of options. We use “in-house scenarios” to examine extreme price fluctuations and their impact on out-of-the-money options. We choose the scenario with the greatest possible loss as the margin requirement.
FAQ
Does margin trading come with extra fees and costs?
If you want to trade on margin, you can upgrade your cash account to a margin account at no extra cost. However, borrowing funds accrue interest which you need to pay.
Costs include debit interest on borrowed funds, which may change frequently.
Where can I apply for a margin account?
You should go to the Client Portal and select Settings. Then, navigate to the Account Configuration section and click on Account Type. Now, you can continue by providing your current experience with margin trading and then sign the margin risk disclosure. For detailed instructions, click here.
Is it possible to receive a margin call?
Interactive Brokers may automatically liquidate positions if margin requirements are not met. Liquidations can occur without prior notice.
Will I be notified before or after a margin liquidation?
No, you will not be notified before liquidation. It is your responsibility to monitor your account and ensure it meets margin requirements at all times. Post-liquidation notifications are also not guaranteed. However, you can manually set up trade alerts to stay informed about account activities, including liquidations.
To help you stay on top of your margin requirements, we provide color-coded account information to notify you that you are approaching a serious margin deficiency. TWS will highlight the row whose value is in the distress state. The colors on your account screen tell you the following:
- Yellow: You have only a 10% cushion above the margin requirement. If your account equity moves rapidly from a greater than 10% cushion to a margin violation, your positions may be liquidated without you receiving a yellow warning.
- Orange: Your margin cushion is depleted and you have a short time to enter into margin-reducing trades before your positions are liquidated. At this point you will not be able to enter into any trades that might increase your margin.
- Red: Your positions will shortly start to be liquidated as necessary to bring your account back within the margin limits.
Is it necessary to have a margin account?
Generally, it is not necessary to trade on margin. Although, some products require you to upgrade to that account type:
- Futures
- CFDs
- Short options and certain option strategies
Which requirements do I need to meet?
You must be at least 21 years old to trade on margin. The deposit value (net liquidation value) must be at least €2,000. If the deposit value is lower, you will automatically trade as with a cash account. You can read more about our minimum requirements on the page of your local branch.
Can I buy all products on margin?
You cannot buy all financial instruments on margin. Risk assets like Penny Stocks, Warrants, and issuer products often demand payment with 100% of your own funds. Some high-risk instruments require 100% margin, meaning no leverage is provided.
How often do margin requirements change?
The exchanges and the broker itself define the requirements for initial margin and maintenance margin. Generally, the margin requirements change once per day, but this can change. Additionally, some future contracts have particularly low intraday margin requirements.
How can I increase my Excess Liquidity?
If you wish to free up more available liquidity to protect yourself from further future declines, there are several actions you can take:
- You can transfer funds to your trading account. To do this, you can use the deposit instructions.
- You can execute an order that lowers your current margin requirements. In most cases this means you can close or reduce a current open position. You can perform an internal transfer from other accounts linked to your securities account
- In TWS you can right-click on a position in your portfolio and subsequently select the “Set Liquidate Last” parameter. If you can’t see this parameter, you can look it up via the search bar on top of the pop-up menu.
If possible, the system will try to protect these positions when a liquidation occurs on your account. However, there is no guarantee that these position(s) will also effectively not be liquidated earlier by the system.
Disclaimer:
The information presented on this webpage has been compiled by LYNX and is intended solely for general informational and marketing purposes for private investors. It does not constitute investment advice or a personal recommendation with respect to any financial instruments, nor does it take into account your individual financial situation, investment objectives, experience, knowledge, or risk profile.
Although the content may include references to financial instruments, strategies, or market developments, it should not be interpreted as a solicitation to buy or sell any specific product. You should not engage in trading or investing activities unless you fully understand the nature of the transactions, the applicable costs, and the risks involved. Trading in financial instruments involves a substantial risk of loss and is not suitable for every investor. It is possible to lose more than your initial investment.
Any opinions or viewpoints expressed are not influenced by remuneration or other forms of compensation linked to specific financial instruments. No relevant conflicts of interest apply, in accordance with the LYNX policy on managing conflicts of interest.
The data shown has been obtained from sources believed to be reliable; however, LYNX does not guarantee the accuracy, completeness, or timeliness of the information. Forecasts, expectations, or historical data are not reliable indicators of future results. Valuations may fluctuate, and returns may be positively or negatively impacted by currency movements, market volatility, or corporate actions.
Be aware that:
- Figures or performance shown refer to the past. Past performance is not a reliable indicator of future performance.
- Returns may increase or decrease due to currency fluctuations if the instrument is denominated in a currency different from that of your residence.
- Where gross performance is shown, fees, commissions, and other applicable charges are not included and may significantly impact net returns. Full cost details can be found on the website of your local LYNX branch.
Before making any investment decision, consider consulting an independent financial adviser to assess the suitability of the product or strategy in the context of your personal circumstances.