What is a margin account?

By Investopedia Staff AAA
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.

RELATED FAQS

  1. If a company has a high debt to capital ratio, what else should I look at before ...

    Learn about some of the financial leverage and profitability ratios that investors can analyze to supplement examining the ...
  2. How can a firm bring down its operating leverage?

    Discover how to determine a company's operating leverage and how this metric can be helpful to analysts and investors when ...
  3. What is the long-term outlook of the banking sector?

    Find out about the long-term outlook for the banking sector. It has significantly changed after legislation that passed in ...
  4. What are the biggest risks involved with financial spread betting?

    Learn about financial spread betting, the risks involved with spread betting and the dangers of placing financial spread ...
RELATED TERMS
  1. Open Trade Equity (OTE)

    Open trade equity (OTE) is the equity in an open futures contract.
  2. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company ...
  3. Ceded Reinsurance Leverage

    The ratio of ceded insurance balances to policyholders’ surplus. ...
  4. Forex Spread Betting

    A category of spread betting that involves taking a bet on the ...
  5. Total Debt-to-Capitalization Ratio

    An indicator that measures the total amount of debt in a company’s ...
  6. Equity Multiplier

    The ratio of a company’s total assets to its stockholder’s equity. ...

You May Also Like

Related Articles
  1. Trading Strategies

    High-Frequency Trading Regulations

  2. Brokers

    Private Equity's Returns Are Tempered ...

  3. Trading Strategies

    How to Do the Fundamental And Technical ...

  4. Trading Strategies

    The Top Five Stocks For Novice Swing ...

  5. Options & Futures

    Advantages Of Trading Futures Over Stocks

Trading Center