No discussion about day trade margin would be complete without taking the time to quickly define margin as it applies to trading accounts – be it stock, treasuries, or leverage forex accounts. To those new to trading with a leverage forex account or other amplified trading account: trading with leverage is extremely risky and can provide very high returns if executed well. Two things to consider before beginning are having enough capital to satisfy your broker’s account requirements, and how to setup your account to avoid a call on the account or worse: a default situation on a trade – resulting in liquidation of the collateral assets of the trader.
Day trade margin really is too broad a term – as there are several layers of account protection for both the trader and the broker. The broker establishes the rules for the day trade margin account and the trader funds it with cash, securities and or other collateral to ensure the ultimate liquidity of the trader’s positions should things go horribly wrong on his or her trades.
Before we go too much further we need to define some terms related to day trade margin. Each of the following types of margin rules must be followed in order to maintain good account status. Failure to do so may result in liquidation of assets (an outcome to be avoided at all costs). A few definitions:
Minimum: Refers to the amount of capital or collateral a trader must have placed with his or her broker prior to trading. Rules state it must be at least the lesser of $2000 or the cost of the trade.
Initial: This varies based on the type of security traded, but basically is a percentage of the purchase price of the assets bought. Maximum for stocks is 50%(2:1 leverage), bonds range from 25%-50%, and currency can be as little as 0.25% (yes… 400:1 leverage).
Maintenance: The amount of equity below which a trader must not allow his account to fall. Falling below this level results in a call on the account – which could be cause for asset liquidation – a devastating blow to an account.
The best bang for the buck on a day trade margin account is by trading forex (learn more here).
For more information including sample trade computations, please review this margin account rules piece.
Best of luck to you in all your investments.
Steve B. Wise
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