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Margin trading

Margin trading is buying more shares than your own cash allows by borrowing from the broker. In margin trading the investor pledges existing shares or cash as collateral, borrows from the broker and buys additional shares with the loan.
Contents
  1. 1.Key points
  2. 2.Formula / calculation
  3. 3.Interpretation
  4. 4.Pitfalls
  5. 5.Frequently asked questions

Key points

  • Because it adds leverage it magnifies both gains and losses; CMB regulations set the collateral ratios.
  • Margin multiplies returns in a rising market; in a falling market it multiplies losses and triggers forced sales.
  • daily interest erodes returns.

Formula / calculation

the initial equity ratio is usually at least 50% (50 TL of own funds for a 100 TL purchase). Equity ratio = (Portfolio value − Loan) / Portfolio value. If the ratio falls below the maintenance level (e.g. 35%) a margin call follows.

Interpretation

Margin multiplies returns in a rising market; in a falling market it multiplies losses and triggers forced sales. A growing margin balance across the market is watched as a sign of excessive optimism.

Pitfalls

daily interest erodes returns. In a sharp decline, if collateral is not topped up the broker closes the position near the bottom. Using margin in volatile, illiquid stocks is especially risky.

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Frequently asked questions

Margin trading is buying more shares than your own cash allows by borrowing from the broker.

the initial equity ratio is usually at least 50% (50 TL of own funds for a 100 TL purchase). Equity ratio = (Portfolio value − Loan) / Portfolio value. If the ratio falls below the maintenance level (e.g. 35%) a margin call follows.

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