I've seen a few posts here where people say they got "margin called" and lost everything. What is margin trading and how does that happen? My broker shows I have "margin available" but I've been too scared to use it.
Also what's the difference between margin on stocks vs futures vs forex? People use the word "margin" in all these contexts and it seems to mean different things.
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Margin = borrowing money from your broker to take larger positions than your cash allows.
Stocks: Typical margin is 2:1. With $10,000, you can buy $20,000 worth of stock. If the stock drops 25%, your $20,000 position is now worth $15,000. But you still owe $10,000 to the broker. Your equity went from $10,000 to $5,000 — a 50% loss on a 25% move. That's how margin amplifies losses.
Futures: Margin here is really "performance bond" or "good faith deposit." You might put up $13,000 to control $275,000 of S&P 500. The leverage is ~20:1. A 1% move against you = 20% of your margin.
Forex: Up to 50:1 in the US, 500:1 offshore (which is insane). A 0.2% move against you at 500:1 = 100% of your account gone.
Margin call: When your losses eat enough of your equity that it falls below the maintenance requirement, the broker demands you deposit more money. If you don't (or can't), they liquidate your positions at market price — often at the worst possible time.
Important detail: during fast-moving markets (flash crashes, market opens after gaps), your broker might liquidate you PAST zero, meaning you OWE them money. It's called a debit balance. I've seen people lose more than their entire deposit on a margin account. It's rare but it happens.
My rule: I never use more than 50% of available margin on stocks, and I always have at least 3x the margin requirement in my account for futures. Margin is a tool, not free money. The moment you think of it as free money, you're in trouble.
Good on you for being scared of margin. That fear will save you thousands of dollars. Most blown-up accounts I've seen were over-leveraged margin trades. Start without margin, learn to be profitable, THEN consider using it conservatively.