What it means
A margin account lets you borrow from a broker to trade. The broker requires you to keep a minimum amount of your own money in the account, called the margin requirement, to protect it against losses.
Equity is the value of your holdings plus cash less the amount you owe. Excess is what is left when you subtract the requirement from equity.
If your equity is $60,000 and the requirement is $50,000, your excess is $10,000. Brokers display this figure on account statements, sometimes under names such as excess equity, excess liquidity or margin surplus, and the exact terminology varies by firm.
The excess changes constantly with market prices. If your holdings rise in value, equity goes up and the excess grows, but if they fall, the excess shrinks and can turn negative.
A negative excess is a margin deficiency and normally triggers a margin call. Experienced traders watch the excess closely and do not run it to zero.
Keeping a buffer allows them to survive a sudden move without being forced to sell at bad prices. Many set a rule such as keeping excess above a given share of equity at all times.
The term is not a standardised accounting measure, so definitions differ between brokers and between markets. Some use initial margin, the amount needed to open a position, and others use maintenance margin, the lower amount needed to keep it, so you should check which one a statement refers to.
Reading the broker's margin policy is time well spent. For businesses that use margin to hedge with futures contracts, excess margin is a liquidity matter.
Treasury teams need cash available at short notice to top up an account, and the excess is a measure of how much room they have.
In practice
Real-world examples.
Example
A private investor looks at her statement and sees an excess of $18,000. She decides to keep it as a cushion rather than buy more shares, because a market fall of 10% would cut her excess to a few thousand dollars.
Example
A food processor hedges wheat prices with futures contracts. Its treasury team tracks the margin excess daily and keeps $500,000 in a separate account for top-ups. When prices spike, the buffer lets it meet margin calls without selling assets.
Example
A hedge fund manager runs a rule that margin excess must never fall below 30% of equity. When positions grow and the excess nears the limit, the risk team asks for some trades to be reduced. This keeps the fund away from forced selling.
Formula
Calculation
Trading margin excess = account equity - margin requirement
Suppose a trader holds shares worth $200,000 in a margin account and has borrowed $140,000, so equity = 200,000 - 140,000 = $60,000. The broker requires maintenance margin of 25% of the market value of the positions, which is 0.25 x 200,000 = $50,000. Trading margin excess = 60,000 - 50,000 = $10,000. If the shares fall by $15,000 to $185,000, equity becomes 185,000 - 140,000 = $45,000, the requirement becomes 0.25 x 185,000 = $46,250, and the excess is 45,000 - 46,250 = -$1,250, which means a margin call.Case study
Seen in the real world.
Tidewater Agri is a fictional grain merchant, and this illustrative case shows how excess margin works. It hedged a large export contract with futures and began with an excess of $1,200,000. As prices rose by 8% in a week, the hedge lost value on paper and the excess fell to $150,000.
The treasurer had arranged a standby credit line and used it to deposit another $1,000,000. The prices later eased and the line was repaid. The illustrative lesson is that the excess is a signal, and a treasury team needs a plan for topping it up before it runs out.
After the episode, the treasurer wrote a short procedure into the hedging policy. It says who is told when the excess falls below 25% of its opening level, who approves a drawdown on the credit line and how quickly funds must reach the broker.
Watch out
Common mistakes.
- Treating excess as free money to spend. It is a safety cushion, and using it all leaves no room for market moves.
- Confusing initial and maintenance margin. Excess measured against the maintenance requirement is larger than excess measured against the initial requirement.
- Assuming the figure only changes when you trade. Market prices change equity and the requirement continuously, so the excess moves all day.
Questions
People also ask.
What happens if excess turns negative?
The broker will usually issue a margin call and, if you do not add funds quickly, may sell positions without asking.
Is trading margin excess the same as buying power?
They are related but not identical, because buying power also depends on the margin rate for new positions.
How much excess should I keep?
There is no universal answer, but many experienced traders keep enough to survive a sharp fall without forced selling. A common approach is to test the account against a fall of 10% to 20% in the positions held.
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