What is margin investing and how does it work?

Margin investing is a tool previously reserved for elite traders and those with deep pockets, but lately, it’s become an increasingly more accessible investing strategy. However, it’s not without risks, and it’s crucial your eyes aren’t bigger than your belly.

Although margin investing can magnify your gains, it can also magnify your losses. So, to help you discover whether using margin could be a useful bow in your investing sheath, this guide will cover all the essential details UK investors should know.

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What is margin investing?

At its core, margin investing allows you to borrow funds from your broker to purchase more investments than you could with your own money alone. So, margin investing allows you to hold larger trading positions with a smaller amount of upfront cash, which can help you maximise any investing success.

This borrowed money is secured against your existing assets on the platform (which act as collateral). The primary benefit of margin trading is the potential to magnify profits. However, it’s essential to remember that while gains can be amplified, so can losses. You need to pay back the loan to your broker, plus interest, regardless of whether you’ve made a profit.

How does margin investing work?

Here’s a step-by-step breakdown explaining the basics of margin investing:

1. Open a margin account. Before using margin, you’ll need to apply for a margin investing account with your broker. You’ll only get accepted if you meet the minimum eligibility, appropriateness, and funding requirements.
2. Initial margin requirement. When you decide to buy stocks on margin, you’re required to deposit a certain percentage of the purchase price upfront, known as the initial margin. For instance, with a 50% initial margin requirement, to purchase £10,000 worth of shares, you’d invest £5,000 of your own money, borrowing the remaining £5,000 from your broker.
3. Minimum portfolio levels. Sometimes called “maintenance margin” or “margin maintenance” interchangeably, this is the minimum portfolio value you must maintain in your account to prevent a margin call. US regulations state you have to maintain at least 25% equity in your account, but requirements depend on the broker and the risk level of specific assets.
4. Calculating margin maintenance. Your margin maintenance is calculated by multiplying each position in your portfolio by the “margin ratio” for that security and then adding them up. If your account’s equity dips below this threshold, perhaps due to market fluctuations and price volatility, you might face a margin call.​
5. Margin call. Somewhat of a dreaded notification for investors is the margin call. This is a broker’s request for you to deposit additional funds or sell some of your assets to boost your account’s equity. Failing to satisfy a margin call can lead to your broker liquidating (selling) your positions to cover the shortfall.

Where can you trade using margin in the UK?

If you’re interested in margin investing, you now have a handful of options across various brokerages, but we think one of the best UK options for margin trading is Robinhood*.

Here’s how Robinhood’s margin investing feature works and why it’s a useful option to consider:

• Application and approval. To start investing with margin on Robinhood, you’ll need to apply on the app. This involves answering some questions around your experience and investing knowledge. You’ll also need a minimum portfolio value of $2,000 to borrow on margin.
• Enhanced buying power. By borrowing funds on Robinhood, you can increase your buying power to potentially amplify your investment returns. Robinhood UK allows you to borrow up to 50% of the purchase price of your investments.
• Act on opportunities. Using margin on Robinhood means you can take advantage of investment opportunities that crop up without having to wait to save up or deposit additional funds.
• Competitive rates. Robinhood offers competitive interest rates for margin investing. These start at 5.75% for margin balances up to $50,000 and then gradually get cheaper for larger margin balances.

Something to keep in mind with Robinhood’s margin investing function is that you can’t have both margin investing and the stock lending features enabled at the same time.

Risks of margin trading

Just like Uncle Ben famously said in Spider-Man, “with great power comes great responsibility”. While margin investing can have its uses and benefits, it isn’t without its potential perils:

• Magnified losses. Just as profits can be amplified, so can losses. A decline in the value of your holdings means you still owe the borrowed amount, potentially leading to losing more than your initial investment.
• Extra costs. You also need to factor in the cost of borrowing using margin. There’s no such thing as a free lunch, and if you want to enhance your buying power, you’ll need to pay to do so. Remember, this interest can accumulate over time, especially if you hold positions for longer periods.
• Margin calls and liquidation. If the market moves against your position, you might be required to inject additional funds on short notice, which can be difficult. If you can’t meet a margin call, brokers can sell your assets or close your positions without consulting you to pay off your margin debt.
• Change of margin maintenance. Margin maintenance requirements for a security (margin ratio) can change at any time without prior notice, and this could impact your open positions and the minimum equity you need to maintain.

Pros and cons of margin trading

Bottom line

Margin investing offers a pathway to potentially enhanced profits by borrowing funds from your broker. However, it also introduces additional risks into your portfolio that could leave you with less money than you started with.

For UK investors, it’s crucial to fully grasp the mechanics, benefits, and possible drawbacks of margin investing before diving in. Using this strategy requires diligent research, a clear understanding of your personal risk appetite, and a well-thought-out plan of action.

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Written by

George Sweeney, DipFA

Deputy editor

George is a deputy editor at Finder. He has previously written for The Motley Fool UK, Nasdaq, Freetrade, Investing in the Web, MoneyMagpie, Online Mortgage Advisor, Wealth, and Compare Forex Brokers. He's focused on making personal finance and investing engaging for everyone. To do this he draws from previous work and his Level 4 Diploma for Financial Advisers (DipFA), sharing what he’s learnt. When he’s not geeking out about money, you’ll find him playing sports and staying active. See full bio

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