Margin and Leverage

Margin is the amount of borrowing a brokerage company will allow against securities that are used as collateral for the money that is borrowed. The collateral that can be used to post margin can be in the form of cash or securities, and it is deposited in a margin account. Margin provides leverage which can increase the volatility of the returns than an investor can receive related to a straight cash account.

A margin trade creates leverage or gearing for an investor which can enhance or detract from the returns of a portfolio. For example, if an investor purchases $100,000 of EUR/USD but only needs to post $5,000 dollars an increase (or decrease) or 5% on the $100,000 would either double the capital or wipe out all the capital used for the trade.