For example, if you have $30,000 in your account, and you're using a 5:1 margin ratio, and you were to make a $10,000 trade, you would really be trading with $50,000, correct? And if you were to lose, you would lose in a 5:1 ratio as well? Can you ever end up owing more than your account has with margin or do the losses top out when your account is wiped out?
How Exactly Does a Margin Account Work?
- Thread starter Gooby
- Start date
To start with Reg-T margin is 2x over-night and up to 4X for day-trading. There is no 5:1 in a customer account in the USA. With a $30K account, you get buying power of up to $120K for day-trading and up to $60K over-night. Yes, it is possible to lose more than your $30K. Eg. If you buy $60,000 of one stock today, and it drops more than 50% tonight, you will owe your broker money.
Not quite. If you have $30K in you account, and make a $10K trade, you are not using leverage at all (more precisely, your leverage is 0.33). Leverage (of over 1) occurs when you make a trade in which the notional value of the trade is more than the value of your account.
In theory, yes. In practice, it probably never happens. Most self-respecting brokerages have real-time controls which monitor the market value of your holdings. If you are in a leveraged trade, the broker would forcefully liquidate your position(s) if the market moves against your position(s) in such a way which would put your account in deficit.
Last edited:
Dont forget that there are many stocks / etfs that brokers wont give margin on as they are risky.