What Is Margin Trading?
Margin trading means borrowing money from your broker to buy more assets than you could with your own capital alone. Your existing holdings or cash deposit serve as collateral for the loan. This amplifies both potential gains and potential losses.
For example, if you have £1,000 and your broker offers 5:1 leverage, you can control a £5,000 position. If that position rises 10%, you make £500 — a 50% return on your £1,000 capital. But if it falls 10%, you lose £500 — half your capital.
How Margin Works in the UK
UK brokers regulated by the FCA must follow strict rules on margin trading:
- Initial margin — The minimum deposit required to open a position, typically 5-50% of the total position value depending on the asset
- Maintenance margin — The minimum equity you must maintain in your account while the position is open
- Margin call — If your equity falls below the maintenance margin, your broker demands additional funds or closes positions
Since 2018, ESMA regulations (retained post-Brexit) cap leverage for retail clients: 30:1 for major forex pairs, 20:1 for minor forex and major indices, 10:1 for commodities, 5:1 for individual shares, and 2:1 for cryptocurrencies.
Margin Trading vs Cash Trading
With a cash account, you can only buy assets with the money you have. With a margin account, you borrow to increase your buying power. The key differences are:
- Buying power — Margin accounts give you 2-30x more buying power depending on the asset class
- Interest charges — You pay daily interest on borrowed funds, which erodes returns over time
- Risk profile — Losses can exceed your deposit, potentially leaving you owing money to your broker
- Complexity — Margin accounts require understanding of leverage ratios, margin calls, and forced liquidation
Understanding Margin Calls
A margin call is a broker's demand for you to deposit additional funds or close positions when your account equity falls below the required maintenance level. Here's how it typically works:
- You open a leveraged position using margin
- The market moves against you, reducing your equity
- Your equity falls below the maintenance margin threshold
- Your broker issues a margin call requiring immediate action
- If you don't respond, the broker may forcibly liquidate your positions at potentially unfavourable prices
Under FCA rules, retail CFD accounts have negative balance protection — meaning you cannot lose more than the funds in your account. However, professional clients do not have this protection.
Types of Margin Products
UK investors can trade on margin through several products:
- CFDs — The most common margin product for UK retail traders. Regulated by the FCA with mandatory risk warnings.
- Spread bets — Unique to the UK and Ireland. Tax-free profits (no CGT) but still carry the same leverage risks as CFDs.
- Futures and options — Standardised contracts traded on exchanges. Typically used by more experienced traders.
- Margin lending — Borrowing against your share portfolio to buy additional shares. Available through some UK stockbrokers.
Managing Margin Risk
If you decide to trade on margin, follow these risk management rules:
- Never use maximum available leverage — use the minimum leverage needed for your strategy
- Always set stop-loss orders to limit downside
- Keep a cash buffer in your account above the maintenance margin requirement
- Avoid holding leveraged positions overnight unless your strategy specifically requires it
- Understand that interest charges compound daily and can significantly reduce returns on longer-term trades
- Never add more money to meet a margin call on a losing position — this is often "throwing good money after bad"
