What are Margin Accounts?
Margin accounts are accounts that investors hold with brokerage firms, through which the brokerage loans money to the investor. The investor may purchase securities with cash he does not have, by using a margin account to do so. The Federal Reserve limits the amount which may be borrowed on margin to 50% of the value of the purchase. A margin account is necessary when selling stocks short, and is usually used by people who simply want to leverage their investment, rather than people who can’t afford the full purchase price of the securities. A broker who offers margin accounts will charge interest for the right to borrow the money, although the interest rate is usually very low. The low rate is meant to entice investors into buying on margin, and the securities and cash the investor has in his account function as collateral for the margin loan. Margin accounts are a form of leverage, which means they can be valuable tools for increasing gains. However, they can also increase losses by
