What does 'buying on margin’ mean and how can I do it?

Buying on margin means that a trader or investor does not need to have the full value of the trade in cash, only part of it, to go long. Because profit and loss are based on a trade’s full position, margin trading can amplify both.

The margin amount or percent is how much of the transaction value you need to have in your account to make the trade.

For example, assume a trader wishes to buy 100 shares priced at £100, and the margin rate is 20%. This trade has a value of £10,000, but the trader doesn’t need £10,000 in their account to make the trade, they only need £2,000 (20% of £10,000). Again, it’s worth noting that when spread betting and trading CFDs, you don’t actually own the underlying asset; you only gain exposure to its price movements.

Trading with leverage​ or margin are similar concepts, expressed in different ways. Margin trading​ is how much of the trade value you need in your account to initiate the trade, such as the 20% discussed above. Leverage is the size of the position relative to the amount of capital required to initiate the position. For example, a £10,000 trade with £2,000 in the account means a leverage ratio of 5:1 is being used.

Different financial instruments have different margin requirements. For example, at CMC Markets, we offer 20% margin when trading on shares, 5% or less on many forex pairs and 5% margin on most indices.

Both derivative products, spread betting* and contracts for difference (CFD trading), have margin requirements, which vary by asset class.

A trader making a spread bet or CFD trade doesn’t own the asset being purchased. Rather, they are opening a contract that will make or lose money based on how the underlying asset performs.

The margin rate lets the trader know how much capital they need in their account to place a spread bet or CFD trade. If they are trading on a forex pair with 3.34% margin, then they only need to have 3.34% of the trade value in the account to initiate the trade. The trade value is provided on each order ticket within our platform, along with the margin requirement in GBP (or whatever currency the account is denominated in).

In a CFD account, the trader decides how many contracts or units of the asset they wish to purchase. This determines the trade value. For example, they may choose to buy or sell $5,000 on the EUR/USD when forex trading or buy 100 shares of stock.

In a spread betting account, the trader chooses how much they wish to risk for each point of movement. This determines the value of the trade. For example, they may choose to risk £1/point in on an index, currency pair or stock.

There are several key differences between buying in a cash account and buying on margin.

Assume a trader with a margin account wants to buy 10 shares of Vodafone stock, trading at £115. The value of this transaction is £1,150, but the margin trader is only required to have 20% of this in the account, or £230.

Assume the shares rise to a price of £130, and the trader sells. The profit is £1,300 - £1,150 = £150. That is a £150 profit on £230 because that is all that was required to make the trade, setting a profit of 65%.

Had the trader accessed a cash account with £230 in it, they would have been able to gain exposure to only two shares, not 10, so their profit would have been £30 (2 shares x £15 profit), or 13%.

Because it was a winning trade, the trader buying on margin has a bigger, or magnified, return.

While gains are magnified when buying on margin, so are losses. Margin means you are gaining exposure to assets worth more than the cash in the account. If those assets fall in value, they can rapidly deplete the amount of cash in the account.

While buying on margin does have more risk than not using margin, the risks can be controlled by using stop-loss orders​ and managing position sizes. A stop-loss order closes out a trade if a certain amount of money is lost or the price of the asset falls to a certain level. Managing a trader’s position size is controlling how much is bet on each trade, because betting too big can result in large losses if the price doesn’t move as expected.

Spread betting and CFDs can incur overnight holding costs​ as they are margined products. Overnight fees vary by asset class and be can positive (you get paid interest to hold an asset overnight) or negative (you are charged), depending on the asset and the direction of the trade.

Typically, holding a trade overnight will incur a small fee. For example, the fee on shares is the interbank rate plus 0.0082%.

Interbank rates vary by country, so overnight holding costs may vary based on the asset’s home currency. This would be applicable if trading assets in more than one country. UK shares use the UK interbank rate, while US shares use the US interbank rate, and the same concept applies to other assets.

Open a demo account to practise placing trades and seeing how margin works. When you’re ready to open a live account and trade on margin, here are numbered steps on how to buy on margin in a spread betting and CFD account:

If you have an existing core portfolio purchased with cash, that can be kept the same if you wish. But some traders opt to leverage any spare cash they own to trade short-term fluctuations.

For example, if there is £5,000 in the account not currently being used, that could be used to take margined day trades or swing trades. That money could be used to take up to £25,000-worth of positions in margined stock trades, or £100,000 or more in margined forex trades, for example. But remember, your losses or profits from leveraging that £5,000 will be magnified, so be sure to use prudent risk management to protect your account balance.

If an asset is experiencing a strong trend, this may be an occasion where traders margin the cash available in the account to take advantage of the trend. This has the potential to magnify returns, while keeping the core portfolio the same. Remember that losses will also be magnified at the same time.