What Is Collateral in Trading?

Summary

Collateral is cash or eligible assets pledged to secure obligations arising from a leveraged position. It is the financial backing that helps protect the broker, clearing firm, or provider against loss.

Definition

In trading, collateral means the cash or eligible securities or assets set aside to secure obligations to a broker, clearing firm, or product provider. The article uses the term broadly across securities margin, futures, and CFDs. In a stock margin account, purchased securities and sometimes other marginable assets may support the broker’s credit exposure. In futures and CFDs, collateral supports leveraged exposure rather than ownership of the underlying asset. Collateral matters because when its value falls, or when required levels rise, the account can become deficient and the trader may need to add funds or face position reduction or liquidation.

Sources

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