Margin Account
What Is a Margin Account?
A margin account is a brokerage account that allows investors to borrow money from their broker to purchase securities. The investor’s existing investments serve as collateral for the loan.
Margin accounts allow investors to use leverage to increase their buying power.
Why It Matters
Margin accounts enable investors to take larger investment positions than they could with their own funds alone. This can increase potential profits but also increases the risk of losses.
Because margin trading involves borrowing money, investors must understand the associated risks and requirements.
How Margin Accounts Work
When using a margin account:
- the investor deposits initial funds
- the broker lends additional funds for investments
- the investor pays interest on the borrowed amount
- the securities act as collateral for the loan
Brokerages typically require a minimum amount of equity to maintain the margin position.
Example
An investor deposits $10,000 into a margin account and borrows an additional $10,000 from the broker. The investor can now purchase $20,000 worth of securities.
Margin Account vs Cash Account
- A margin account allows borrowing funds to invest.
- A cash account requires investors to pay the full purchase price for securities.
FAQs About Margin Accounts
Do margin accounts charge interest?
Yes. Investors typically pay interest on borrowed funds.
Are margin accounts risky?
Yes. Losses can exceed the investor’s initial investment.
Why do investors use margin accounts?
To increase purchasing power and leverage investment positions.
Related Terms
