Margin is the amount of cash that an investor must supply from their own resources in order to initiate a trade via a margin account. The amount of margin will vary depending on the asset or instrument. For example, currency trading (i.e. forex trading) usually requires a margin that is only a single-digit percentage (or less) of the currency’s contract value. It is not uncommon to see leverage ratios of 100:1 or higher as a trader puts up 1% of the contract as margin. On the other hand, stocks that are allowed to be traded on margin, called marginable stocks, require significantly more margin – typically anywhere from 30-50 percent of the value of the transaction. One of the key factors that weigh into this is a stock’s volatility. A higher amount of volatility will require a higher margin percentage.
Margin trading requires that trades set up a margin account with a broker. This is different from a traditional cash account (i.e. a brokerage account). A cash account is the account that an investor will use to buy and sell shares of stocks, mutual funds, ETF's, bonds - essentially any financial instrument where the investor is looking to purchase only a specific amount of that asset (e.g. an investor pays $3,053.00 for 100 shares of stock in AT&T that is trading at $30.53). However, there are some forms of trading, such as short selling, that can only be executed via a margin account. The same is true for assets on the commodities and futures markets.
Because of the risk involved with trading on margin, it is governed by a number of entities including the Federal Reserve Board, self-regulatory organizations (SROs) such as the New York Stock Exchange (NYSE) and the Financial Industry Regulatory Authority (FINRA). Each of these organizations has rules for margin trading. One FINRA rule, for example, sets the minimum margin that must be in a margin account before trading can commence as $2,000. The Federal Reserve Board has many regulations including Regulation T which states that an investor’s initial margin must be at least 50% of the purchase price.