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What is Margin & How Does It Work ( Page 1 of 3)

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How Margin Works

With all leveraged products such as spread betting there are two types of margin. One is called initial margin and the other maintenance margin. In spread betting initial margin is often referred to as deposit margin, Notional Trading Requirement (NTR) or deposit factor.

Initial Margin

What makes margin trading so exciting is that you only have to use a percentage of the capital to control the full asset. Using a traditional stockbroker if you bought £1000 of shares the broker would ask you to deposit the full amount.

But with margin trading you may only have to put up as a deposit say 10%, or £100 in order to buy the £1,000 of stock. So if the share price rises in price, the percentage return on capital invested will be far greater. Of course, margined trading is a double-edged sword, big profits can be scored if you bet right, but then large losses if you bet wrong, see table below.

Profit & Loss Effect on Margin Trading re Capital Invested

Profit & Loss (%) Profile on Capital Invested
70p
80p
90p
100p
120p
130p
140p
No Margin
Buy £1,000 of
ABC stock at
100p

Funds = £1,000
-30%
-20%
-10%
0
10%
20%
30%
Margin Employed
Buy £1,000 of ABC
stock at 100p

Funds = £100 (10%)
-300%
-200%
-100%
0
100%
200%
300%

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