Collateral
Collateral is money or assets pledged to secure a loan or a leveraged position; the lender can take or sell it if you cannot cover losses.
Collateral is what you pledge so a broker will lend to you or let you hold a leveraged position. In a margin account, the cash and securities in the account back the loan. If their value falls too far, the broker can ask for more money or sell your holdings. Margin and collateral rules differ by country and by broker.
- Category
- Risk Management
- Reading time
- 3 min
- Also called
- Margin collateral, Security for a loan
- Updated
Collateral in plain words
When you buy on margin, the broker lends you money and holds the assets in your account as security for the loan.1
Your margin agreement explains that the securities you buy back the loan.2
In forex, the deposit you put up when opening a trade is held by the broker as collateral.3
How collateral works in a margin account
You borrow
The broker lends you cash against the assets in your account.1
The securities back the loan
Whatever you buy with the loan becomes security for it.2
A minimum must be kept
In the US, your equity must stay at or above 25% of the market value of the margined securities.2 Other countries use different rules.
Firms can ask for more
Expect that your broker can raise its own requirements at any time, without written notice.1
Assets can be sold
If you fall short, the broker can sell the margined shares or anything else in your account.1
Losses can exceed cash
Remember that with margin you can lose more than everything you put in.2
Worked examples
Example 1 — Buying on margin
Loan 50A hypothetical investor puts in 50 and borrows 50 to buy 100 of stock.
| Collateral | 100 of stock |
| Loan | 50 |
The loan is secured by the assets sitting in your account.1
Example 2 — Value falls
Forced sale riskThe hypothetical stock drops to 60; equity is 60 − 50 = 10, below the broker's minimum.
| Equity | 10 |
To cover the shortfall, the broker sold assets from the account — including shares that were not bought on margin.1
Example 3 — Losing more than you put in
−120%The hypothetical stock falls to 40.
| Value | 40 |
| Owed | 50 |
| Loss | 50 + 10 = 60 on 50 invested |
Because the purchase was financed, the loss ended up larger than the original investment.2
Collateral vs margin
| Aspect | Collateral | Margin |
|---|---|---|
| What it is | Assets pledged | Money borrowed or deposit |
| Who holds it | Broker | Broker |
| Falls in value | Triggers calls | — |
| Rules | Vary by country | Vary by country |
Where it shows up
Margin accounts
Backing Margin loans.
Margin calls
Triggering a Margin Call.
Liquidation
Leading to Liquidation.
CFDs
Deposits on a Contract for Difference.
Advantages and disadvantages
Advantages
- Lets you borrow to invest.
- Rules are written in the agreement.
- Can use existing holdings.
Disadvantages
- Holdings can be sold without your say.
- Requirements can change.
- Losses can exceed your cash.
- Rules differ by country and broker.
Going deeper
Read as far as you need. Each level builds on the one before it.
The basics
Beginner
Margin is a loan secured by your own holdings.1
Minimums
Intermediate
The US minimum maintenance level is 25% of the margined securities' market value; other countries set their own.2
Firm discretion
Advanced
Brokers can raise house requirements without notice and sell any asset in the account to cover a shortfall.1
Common mistakes
Ignoring the agreement
Read the margin terms.
Assuming notice
Firms may not warn you.
Borrowing the maximum
Leave a buffer.
Assuming one country's rules
Rules differ.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Collateral is what backs a loan or leveraged position.
- In margin accounts, your assets are the collateral.
- A falling value can trigger a call or sale.
- Losses can exceed your cash.
- Rules differ by country and broker.
Frequently asked questions
Is collateral the same as margin?
Can my broker sell my shares?
Are rules the same everywhere?
Further learning
- Margin
Borrowing to trade.
- Margin Call
When collateral falls.
- Liquidation
Forced selling.
- Leverage
Why losses grow.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- FINRA. Know What Triggers a Margin Call (opens in a new tab) Checked .
- Investor.gov (SEC). Investor Bulletin: Understanding Margin Accounts (opens in a new tab) Checked .
- CMC Markets. What is Margin in Forex? (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.