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An investor with a margin account can usually borrow up to 50% of the total purchase price of marginable investments. The percentage amount may vary between different investments. Each individual brokerage firm has the right to define which investments among stocks, bonds or mutual funds can be purchased on margin.

How a Margin Account Works

A margin account, based on the equity in an investor's account, works essentially in the same way as a bank willing to loan money on home equity. Buying on margin involves an investor's brokerage firm lending the investor money against the value of cash or investment assets currently in the margin trading account. The amount borrowed is referred to as a margin loan that the investor can use to purchase additional investments.

For example, if an investor has $10,000 in his margin trading account, he could potentially purchase up to $20,000 of stock by borrowing the remainder of the required purchase funds from his broker in the form of a margin loan. An investor can borrow against cash in the account or against marginable stocks or debt securities, such as bonds, in the account.

Buying on margin provides investors the ability to leverage their investments, to maintain larger investment portfolios than they could using only their available cash. The leverage magnifies any profits realized from the investment, but it also magnifies losses in the same way. Additionally, an investor must pay back whatever margin loan he has received from his broker along with the interest that is charged on the loan. Monthly interest charges accrue against margin loans.

Margin Calls

Trading on margin makes investors subject to margin calls. If the value of the cash and investments in the investor's margin account drops below a certain level, then the investor receives a margin call from the brokerage firm. The margin call requires the investor to deposit additional cash or marginable investments to bring the value of the account up to the minimum required level. Failure to do so gives the brokerage the right to liquidate sufficient securities to meet the margin call.

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