A:

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.

RELATED FAQS
  1. What are the different types of margin calls?

    Learn the differences between margin calls and fed margin calls while reviewing the definitions of each and how to satisfy ... Read Answer >>
  2. Profit margin versus operating margin: What's the difference?

    There are some distinctions between profit margin and operating margin. Both measure efficiency of a firm, but one takes ... Read Answer >>
  3. What is the difference between extensive margin and intensive margin in economics?

    Find out why it is important for traders to understand the difference between initial margin requirements and maintenance ... Read Answer >>
Related Articles
  1. Managing Wealth

    What’s a Good Profit Margin for a New Business?

    Surprisingly, the younger your company is, the better its numbers may look.
  2. Trading

    A Guide to Day Trading on Margin

    Buying on margin is a good option if you don't have the cash to day trade.
  3. Investing

    Spreading The Word About Portfolio Margin

    An underused opportunity provided in an SEC rule can enhance returns and lower risk for spread traders.
  4. Managing Wealth

    What's a Good Profit Margin for a Mature Business?

    How to determine if the amount you clear dovetails with the competition.
  5. Investing

    Covered Call Strategies for a Falling Market

    Find out how to come out on top, even when the market is dropping.
  6. Trading

    Pick the Right Brokerage Account for Options

    Follow these steps to pick the right options brokerage account depending on your trading needs.
  7. Personal Finance

    The Best Way to Borrow

    There are many ways to secure funding. Find out the pros and cons of each way to borrow.
RELATED TERMS
  1. Buying On Margin

    Buying on margin is the purchase of an asset by paying the margin ...
  2. Margin

    Margin is borrowed money that is used to purchase securities. ...
  3. Buying Power

    Buying power is the money an investor has available to buy securities ...
  4. Call Money Rate

    The call money rate is the interest rate on a short-term loan ...
  5. Variation Margin

    A variable margin payment that is made by members to their respective ...
  6. Five Hundred Dollar Rule

    The five hundred dollar rule is a regulation that prevents a ...
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center