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Margin Account Definition
A margin account is a brokerage account that allows you to borrow money from your broker to buy securities. The securities in your account serve as collateral for your loan, so you must maintain a minimum level of equity in your account.
How a Margin Account Works
The overall structure of a margin account involves the use of borrowed funds to increase your purchasing power. A margin account lets you increase your potential returns, as you can invest more than your personal cash balance.
Margin accounts also provide trading flexibility, as you can use borrowed funds to take advantage of investment opportunities. Margin accounts require a minimum amount of equity, known as the margin requirement.
If the value of the securities in your account drops below this margin requirement, you must deposit additional funds or securities to meet your broker’s margin call.
Margin accounts charge interest on the funds that you borrow, which can add to the cost of trading. If you fail to meet a margin call, your broker may liquidate your securities in your account to cover the shortfall.
Margin Account Examples
Webull and Fidelity offer margin accounts to investors.
A Webull margin account allows investors to borrow funds to purchase securities. For example, a 50% margin allows an investor with $10,000 in cash and securities in their account to purchase up to $20,000 worth of securities.
A Fidelity margin account also allows investors to borrow funds to purchase securities. But Fidelity’s margin requirements vary based on the security trades. And there are higher margin requirements for more volatile securities.
In addition, Fidelity offers a margin calculator to help investors determine their margin requirements and potential borrowing power.
Benefits of a Margin Account
A margin account offers a variety of benefits:
- Opportunity to leverage assets: As a trader, you have access to more capital for investment opportunities than others who use their own resources only.
- Profit from share declines: By borrowing on margin, you can buy more stocks than your current cash balance permits. This allows you to benefit from any downturn in stock prices.
- Diversify your portfolio: A margin account allows you to diversify your portfolio by leveraging existing assets as collateral.
- Line of credit: A line of credit increases total buying power. You can make larger purchases than you would be able to with only your own cash in your account.
- Low-interest rates: Interest rates on margin accounts are quite low compared to those of personal loans or credit cards.
- Repayment flexibility: Depending on your current financial situation, you may be able to adjust the repayment rate of your loan. You may also take out a larger loan for a longer period, allowing you to plan for unexpected market movements.
- Tax-deductible interest: Margin account interest may be tax-deductible under certain circumstances in some countries. So, when you file your taxes, you can deduct the interest on your loan to buy securities. This results in significant savings.
Risks of a Margin Account
Be aware of the risks involved in a margin account:
- Margin call: A margin call occurs when your equity drops below the minimum amount set by your broker as an acceptable level of risk. Then, you must deposit additional money or securities into your account.
- Interest payments: You must pay interest on the funds you borrow to trade securities, as well as on any capital gains earned. It can become expensive if you don’t manage it well, as the interest amount will accrue over time.
- Reduced flexibility for future income: When using funds from a margin account for investing and trading, you must set aside funds for repayment. This limits your borrowing capacity in the future.
- You can lose more than you invest: If successful trades turn sour due to market conditions or other factors, you might owe your broker more money than you have in your account.
Margin Account vs. Cash Account
The table below summarizes some similarities and differences between margin accounts and cash accounts:
|Feature||Cash Account||Margin Account|
|Investment||You invest your own money||You invest borrowed money|
|Funds||You have limited funds to invest||You have more funds to invest|
|Risk||The risk is smaller||The risk is greater|
|Gains||The potential gains are fewer||The potential gains are greater|
|Investor||It’s better for beginners||It’s better for experienced investors|
|Securities||You can purchase and hold securities||You can purchase and hold securities|
|Brokerages||Available at Fidelity, TD Ameritrade, and Webull||Available at Fidelity, TD Ameritrade, and Webull|
How to Open a Margin Account
Opening a margin account is a four-step process:
- Research stockbrokers that have margin accounts. Investigate fees and minimum account balance requirements that might affect your investing decisions. Find and read reviews of stockbrokers to see the ratings of their systems and customer service.
- Open a brokerage account. Open your brokerage account with your chosen provider. You must agree to the broker’s terms of service and make an initial deposit of $500 or more.
- Deposit funds into your account. Your provider will ask for an electronic transfer or a check deposit.
- Start trading on your margin account. Now you can decide on the securities and investments you wish to purchase.
3 Best Margin Accounts
The following three margin accounts are among the best:
- Webull is a mobile app-based brokerage offering commission-free trading with advanced tools and research resources.
- Fidelity offers a wide range of investment products and services. Fidelity charges low fees and offers excellent customer service.
- TD Ameritrade offers a wide range of investment products and services, advanced trading tools and educational resources. It has a user-friendly platform.
Are Margin Accounts a Good Idea?
A margin account is good for an experienced investor who can manage investments responsibly and understand the risks. If you are new to trading, it’s best to start with a cash account.
Investing in a margin account can be risky, but you can make intelligent choices about your finances if you understand the potential pitfalls. Always do your due diligence to cover losses and avoid a margin call.
Margin Account FAQs
What is the minimum requirement for opening a margin account?
The minimum requirement for opening a margin account varies depending on the broker. It ranges from $2,000 to $5,000 in cash or securities.
What is a margin call?
A margin call is a broker’s demand for additional funds or securities from an investor when the value of the securities in the account falls below the required minimum level.
What is a portfolio margin account?
A portfolio margin account calculates margin requirements based on the overall risk of a portfolio of securities rather than the margin requirements of each security.
It allows investors greater buying power and lower margin requirements than standard margin accounts.