Margin and Settlement Explained

At a glance

Initial margin: What you must post to open a position
Maintenance margin: What you must maintain to keep it
Liquidation: Often automatic, at market, without notice
Settlement: One business day after trade for US equities

Key takeaways

Margin in equities is a loan against your securities; margin in futures is a performance bond, which behave differently.
Maintenance margin requirements can be raised by the broker or exchange without notice, particularly during volatility.
Automatic liquidation closes positions at market during the worst conditions, and in futures and crypto it frequently occurs with no call at all.
Cash accounts avoid margin risk entirely but must wait for settlement before reusing funds, which limits turnover.
Settlement timing determines fund availability, dividend entitlement, and, in cash accounts, whether a trade constitutes a violation.

Two different things called margin

Aspect	Equity margin	Futures margin
What it is	A loan secured by your securities	A performance bond; no loan
Interest charged	Yes, on the debit balance	No
Typical leverage	2:1 overnight, 4:1 intraday (US)	10:1 to 30:1, set by exchange
Set by	Regulation plus broker policy	Exchange, plus broker additions
Daily settlement	No; profit and loss is unrealised	Yes; cash moves daily
Can change suddenly	Yes, particularly on volatile names	Yes, exchanges raise margins in volatility
Liquidation	Usually after a call with a deadline	Often automatic and immediate

Margin calls and liquidation

1
Equity falls below the maintenance requirement
Either because positions lost value, or because the broker raised the requirement, which happens on volatile names with little warning.
2
A call is issued, or not
Equity brokers typically issue a call with a deadline. Futures and crypto venues frequently liquidate automatically with no notice.
3
You deposit funds or reduce positions
If a call exists and you can meet it. Note that depositing funds during a drawdown is the top-up spiral discussed in risk management.
4
The broker liquidates
At market, at whatever price prevails, in an order determined by broker policy rather than by your preference.
5
The loss is realised at the worst moment
Liquidation occurs during maximum stress, frequently near a local extreme, converting an unrealised loss into a realised one.

Cash accounts versus margin accounts

Property	Cash account	Margin account
Leverage	None	Available up to regulatory limits
Short selling	Not possible	Possible with a locate
Settlement constraint	Must wait for funds to settle	Can trade against unsettled funds
Turnover	Limited by the settlement cycle	Unconstrained by settlement
Pattern day trader rule (US)	Does not apply	Applies below 25,000 USD
Margin call risk	None	Yes
Securities lending by the broker	Generally not	Your shares may be lent out
Suitable for	Beginners; anyone who does not need leverage	Active traders needing shorts or leverage

Cash accounts eliminate an entire category of risk. The cost is the settlement constraint: funds from a sale are unavailable until settlement, which limits how frequently the same capital can be redeployed. For a swing or position trader, that constraint is usually irrelevant, which makes cash accounts an underused option.

Settlement cycles and what they affect

Market	Settlement	What it affects
US equities and ETFs	One business day after trade	Fund availability; dividend entitlement
Futures	Daily mark to market	Cash moves every day; no settlement wait
Options	One business day	Assignment and exercise timing
Spot forex	Two business days conventionally	Rollover and swap charges
Crypto	Immediate or on-chain	Withdrawal timing; venue risk
Bonds	Varies by market	Accrued interest calculations

Dividend entitlement is determined by settlement, which is why the ex-dividend date precedes the record date.
Cash account violations such as good-faith and free-riding violations arise from trading with unsettled funds.
Fund availability after a sale in a cash account is delayed until settlement, which constrains turnover.
Corporate action eligibility including voting rights depends on settled ownership.
Short settlement failures are monitored, which is part of why locate requirements exist.

Practical guidance

Keep a buffer well above maintenance. Requirements can rise without notice, and a position at the edge of the requirement is one volatility spike from liquidation.
Read the liquidation policy before you need it. Which positions close first, whether a call is issued, and how much time you have.
Check whether negative balance protection applies. It exists for retail clients in some jurisdictions and not in others, and futures accounts generally lack it.
Understand securities lending. In a margin account, your shares may be lent to short sellers, which can affect dividend tax treatment.
Consider a cash account if you do not need leverage or shorts. It removes margin risk entirely at the cost of the settlement constraint.
Model a margin increase in your risk planning. Assume the requirement can rise 50 percent during stress and confirm you would survive it.

Frequently asked questions

What is the difference between initial and maintenance margin?

Initial margin is what you must post to open a position; maintenance margin is the lower level you must keep to hold it. Falling below maintenance triggers a call or liquidation. The gap between them is your buffer, and it is smaller than most traders assume, particularly in futures.

Can my broker liquidate my positions without asking?

Yes, and in futures and crypto it is standard. Equity brokers typically issue a call first, but their agreements generally reserve the right to liquidate immediately if conditions warrant. You do not control which positions close or in what order, which is why a buffer matters more than a plan for responding to a call.

Should I use a cash account or a margin account?

A cash account if you do not need leverage or short selling: it eliminates margin risk entirely, and the settlement constraint rarely binds for swing or position traders. A margin account if you need shorts, leverage, or the ability to trade against unsettled funds. In the US, a cash account also avoids the pattern day trader rule.

Why did my margin requirement increase?

Brokers and exchanges raise requirements on individual instruments during volatility, ahead of known events, or when a position becomes large relative to your account or to market volume. It happens with little notice and can force a liquidation even when your position has not moved further against you.

What does T+1 settlement mean for me?

That ownership legally transfers one business day after the trade. In a margin account it is largely invisible. In a cash account it determines when proceeds from a sale become available to reuse, and trading with unsettled funds can produce account violations and restrictions.

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Educational use only. This guide explains how a strategy works. It is not investment advice, not a recommendation, and no result described here is a forecast. Test any approach on historical and out-of-sample data, size positions conservatively, and never risk money you cannot afford to lose.