ExpertGlossary

Margin is the minimum amount of collateral - in either cash or securities - you must have in your margin account to buy on margin, sell short, or invest in certain derivatives.

The initial margin requirement is set by federal law and varies from product to product. For example, to buy stock on margin, you must have at least 50% of the purchase price in your account.

After the initial transaction, maintenance rules set by the self-regulatory organizations, such as the New York Stock Exchange (NYSE) and NASD, apply.

Under those rules, you must have a minimum of 25% of the total market value of the margined investments in your account at all times. Individual firms may set their maintenance requirement higher - at 30% or 35%, for example.

If your equity in the account falls below the maintenance level, you'll receive a margin call for additional collateral to bring the account value back above the minimum level.

Margin accounts are brokerage accounts that allow you a much wider range of transactions than cash accounts.

In a cash account you must pay for every purchase in full at the time of the transaction. In a margin account, you can on margin, sell short, and purchase certain types of derivative products.

Before you can open a margin account, however, you must satisfy the firm's requirements for margin transactions. You must also agree in writing to the terms of the account, and make a minimum deposit of at least $2,000 in cash or qualifying securities.

If you buy on margin or sell short, you pay interest on the cash or the value of the securities you borrow through your margin account and must eventually repay the loan.

Because both types of transactions use leverage, they offer the possibility of making a substantially larger profit than you could realize by using only your own money.

But because you must repay the loan plus interest even if you lose money on the investment, using a margin account also exposes you to more risk than a cash account.

Because the US income tax system is progressive, your tax rate rises as your taxable income rises through two or more tax brackets.

Your marginal tax rate is the rate you pay on the taxable income that falls into the highest bracket you reach: 10%, 15%, 25%, 28%, 33%, or 35%.

For instance, if you have a taxable income that falls into three brackets, your would pay at the 10% rate on the first portion, the 15% rate on the next portion, and the 25% federal tax on only the third portion. Your marginal rate would be 25%.

However, your marginal tax rate is higher than your effective tax rate, which is the average rate you pay on your combined taxable income. That's because you're only paying tax at your marginal, or maximum, rate on the top portion of your income.

Keep in mind that your marginal tax rate only applies to tax on ordinary income and does not take into account other tax liabilities - such as realized long-term capital gains which are taxed at your long capital gains rate - or tax credits for which you may be eligible, which may reduce the actual tax you pay.

To protect the margin loans they make, brokers issue a margin call if your equity in your margin account falls below the required maintenance level of at least 25%.

If you get a margin call, you must deposit additional cash or securities to meet the call, bringing the balance of the account back up to the required level.

If you don't meet the call, securities in your account may be sold, and your broker repaid in full. For example, if you buy 1,000 shares on margin when they are seliing at $10 a share, and the price falls to $7 a share, your equity would be $2,000 ($7,000 market value minus $5,000 loan is $2,000).

That's 28.6% of the market value. If your brokerage firm has a maintenance requirement of 30%, you would receive a margin call to bring your equity back to the required level - in this case $2,100, which is 30% of $7,000.

You might also get a margin call if you trade futures contracts and the value of your account drops below the required maintenance level. However, margin requirements for futures are different than for stock.

The margin requirement is the minimum amount the Federal Reserve, in Regulation T, requires you to deposit in a margin account before you can trade through that account.

Currently this minimum, or initial margin, is $2,000, or 50% of the purchase price of securities you buy on margin, or 50% of the amount that you receive for selling securities short.

In addition, there's a minimum maintenance requirement, a minimum of 25% and often more, of the market value of the securities in the account. The maintenance requirement is set by the New York Stock Exchange (NYSE), the National Association of Securities Dealers (NASD), and the individual brokerage firms.