In more detail
The required margin is the position size times the margin percentage; leverage is 100 / margin %, so a $50,000 position at 25% margin needs $12,500 of equity and is 4 times leveraged. Brokers set an initial margin to open a position and a lower maintenance margin below which your equity must not fall; if it does, a margin call forces you to add cash or sell, and the broker may sell for you without asking. You also pay interest on the borrowed amount.
Why it matters
Gains and losses are both magnified: a 10% fall in a 4× leveraged position wipes out 40% of your own money. Forced selling at the bottom turns a temporary fall into a permanent loss.
Example
You buy $20,000 of shares with $10,000 of your own money and $10,000 borrowed (50% initial margin), and the maintenance margin is 25%:
- A 10% fall to $18,000 costs $2,000, 20% of your equity
- A margin call comes when
(value − 10,000) / valuedrops to 25%, at a value of $13,333.33, a fall of 33.3%
Common confusion
Trading margin is borrowed money; profit margin is profit as a share of a selling price.