What Is Trading Margin Excess?
Trading margin excess refers to the funds remaining in a margin trading account that are available to trade with. In other words, they are the funds left over, presumably after a trader has taken out his positions for the day or the current trading session. They can be put toward the purchase of a new position or the increase of an existing one.
Because margin trading accounts provide a leveraged amount of funds with which to invest, the trading margin excess reflects not the actual cash remaining in the account, but the amount left available to borrow.
Trading margin excess is also often referred to as free margin, usable margin or available margin. However, trading margin excess is not to be confused with excess margin, although the terms sound the same. Excess margin is the value of an account – in either cash or securities – that is above the legal minimum required for a margin account or the maintenance requirement of the brokerage firm holding the account.
- Trading margin excess refers to the funds in a margin account that are currently available to trade with.
- Since margin accounts utilize leverage, the trading margin excess reflects not the actual cash remaining in the account, but the amount left available to borrow.
- Trading margin excess is also often referred to as free margin, usable margin or available margin.
How Does Trading Margin Excess Work?
A margin account allows traders or investors the ability to purchase beyond the actual cash value of the account via leverage – that is, borrowing. For instance, say Trader John has a margin trading account with a 10:1 leverage. That means he could have $10,000 cash in that account and be able to trade up to a value of $100,000.
Now, let's say our trader takes some positions (that is, places orders to invest) in some stock, to the tune of $60,000 worth. His account now has a trading margin excess of $40,000 ($100,000 - $60,000). In other words, $40,000 constitutes his amount of available margin – that is, the amount of borrowed funds left after his open positions are taken. Trader John can use that $40,000 to make more trades, take out new positions or augment his current ones.
Dangers of Trading Margin Excess
Of course, for clarity’s sake, this is a somewhat simplified example. It doesn’t take into account some facts of life margin-account life. Most brokerages who offer such accounts set requirements, for an investor’s, and their own, protection – minimum amounts (generally, a percentage of your holdings’ market value) that one must maintain in the account, or maximum amounts one can borrow per trade.
There are also government and industry regulations: The Federal Reserve Board, for example, prohibits buying more than 50 percent of a security’s purchase price on margin. The Financial Industry Regulatory Authority (FINRA) requires that margin account-holders maintain minimum levels of equity in their accounts at all times, or risk having their trading privileges suspended.
For all these reasons, Trader John has to be careful. While margin allows traders and investors the opportunity to profit, it also offers to the potential to sustain catastrophic losses. The margin, or borrowed money, has to be repaid (usually by the end of the trading day) and if the trader has guessed incorrectly, he can end up owing a huge sum. A trader shouldn’t even think about utilizing all of his trading margin excess – his buying power, so to speak – simply because it is available.