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What's a Margin Account And How Does It Work

January 04, 20242 min read

Those of you who are interested in stock loans and how they work may be interested to learn about margin accounts.

Essentially, margin accounts let you borrow cash for the purposes of purchasing securities.

Read on to learn more about what it might mean for you to have a margin account.

What is a Margin Account?

So what is a margin account exactly and how does it differ from stock loans?

According to Schwab, "brokerage customers who sign a margin agreement can borrow up to 50% of the purchase price of marginable investments (the exact amount varies depending on the investment)."

These accounts allow investors to purchase up to double the amount of marginable securities than they could otherwise.

How They Work

Margin accounts, much like other accounts, do have an interest rate attached to them. In addition to this, margin account holders are required to have a maintenance margin.

A maintenance margin is a fixed minimum amount that must remain in the account for marginable trade to be allowed. This amount is determined by subtracting the borrowed amount from the total value of the account.

What are the Requirements?

You should keep in mind that not all securities can be purchased on margin.

According to FINRA,

"as a general matter, the customer's equity in the account must not fall below 25 percent of the current market value of the securities in the account. Otherwise, the customer may be required to deposit more funds or securities in order to maintain the equity at the 25 percent level. The failure to do so may cause the firm to force the sale of--or liquidate--the securities in the customer's account in order to bring the account's equity back up to the required level."

You should also be aware that firms do have the right to create "house" margin requirements. These simply have to be higher than the minimum set by FINRA regulations. You will want to check with your firm about these requirements.

What are the Risks?

Perhaps the largest risk of opening a margin account is that your securities could decrease in value, meaning you borrowed more than your account is worth (and will thus lose money on your investment).

The other major risk is that your firm could sell your securities (with or without contacting you first, depending on the terms of your loan). If your account equity dips below the required maintenance margin, your firm has the right to sell.

Whether or not these risks are worth the investment, you will need to decide.

David

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