A:

A margin account is an account offered by brokerages that allows investors to borrow money to buy securities. An investor might put down 50% of the value of a purchase and borrow the rest from the broker. The broker charges the investor interest for the right to borrow money and uses the securities as collateral.

The specific calculations as to how margin works get a little more complicated, but you can learn about this in our Margin Trading tutorial.

The important thing to understand about margin is that it has consequences. Margin is leverage, which means that both your gains and losses are amplified. Margin is great when your investments are going up in value, but the double-edged sword of leverage really hurts when your portfolio heads south. Because margin exposes you to extra risks, it's not advisable for beginners to use it. Margin can be a useful tool for experienced investors, but until you get to that point, play it safe.

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RELATED TERMS
  1. Buying On Margin

    The purchase of an asset by paying the margin and borrowing the ...
  2. Margin Call

    A broker's demand on an investor using margin to deposit additional ...
  3. Margin Account

    A brokerage account in which the broker lends the customer cash ...
  4. Initial Margin

    The percentage of the purchase price of securities (that can ...
  5. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin ...
  6. Borrowing Power Of Securities

    The value associated with being able to invest in securities ...
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