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Margin Debt

Reviewed by Sweta | Updated on Sep 30, 2020

Catalogue

Introduction

Margin debt is the debt incurred by brokerage customers who use margin account for trading. It is a situation where you borrow a part of the initial capital from the broker to purchase securities instead of buying it from your own savings. The borrowed capital is known as margin debt, and the portion contributed by self is known as the margin. Margin debt is the opposite of own funds used to fully buy the securities themselves.

Why Margin Debt is important?

Margin debt is generally used in the case of short selling of securities. In such cases, security is borrowed instead of money. Brokerages lay certain regulations when you buy securities on margin, which can be more strict than regulators,

In general, the margin is required to be maintained at a prescribed ratio. In case the margin maintained falls below the threshold level, the broker will call upon the customer to meet the shortfall.

In the margin debt scenario, a customer has to pay a portion of the security as a deposit instead of paying the whole cost of the securities.

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