Understanding Initial Margin: Impact on Stock Trading Decisions

Initial margin is the amount of money that you have to put up when purchasing stocks on margin with a broker. Here are the basics of initial margin and how it can affect your investment decisions.

Initial Margin

When you get involved with margin trading, you are going to have to put up a certain amount of your own money in order to trade. With current laws, you have to put up at least 50 percent of the money for these transactions. For example, if you wanted to buy $20,000 of stock on margin, according to the law, you would have to put up at least $10,000 of your cash. Depending on what broker you have, your initial margin might actually be more than 50 percent.

Impact

When you consider initial margin with each trade, it can significantly impact your trading decisions. The initial margin is the amount of money that you are personally putting at risk with each trade. However, if you lost the trade completely, you would also lose funds from the broker. This means that you would then be in debt. Because of this, most investors will take extreme precaution when they are trading with initial margin. They are less likely to take big risks.