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Handling Portfolio Margin

Risk Management

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Portfolio Margin is a completely optional risk which can drive you deep into debt if you are careless or greedy. If you open a margin account, your broker lends you money using your deposited account capital (and any resulting trade positions) as collateral. Equity margin is SEC limited to 2 times deposit in the USA. As you exceed your deposited capital and use more margin, you increase the amount you gain and lose per trade. Two times capital means your broker will effectively double your accessible capital for equity trading with a loan. Full margin usage doubles potential gains and losses. You also have the option of acquiring special accounts with higher maximum margins.

If you deposit $25,000 you will see “max equity buying power” for roughly $50,000. You might be tempted to use it all and get double returns on your deposit, but if you lose money you will still owe your broker the $25,000 loaned to you. Once you’ve lost a certain amount (or more) of the initial deposit your broker will issue you a margin call. Margin calls are effectively “Going into Collections” warnings for your trading account. Pay up or you’ll be sold out of any remaining positions and/or your account will be closed (and you’ll potentially be sued).

For equity portfolios, it’s wise to only use a percentage of margined capital. Initially, use only your deposited capital. Diversify your deposited capital across 30 to 50 asset positions, and use margin only to increase your winnings. Only add margin capital to winning trade positions with continuing economic and fundamental trends. This strategy avoids margin calls.

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