What is a Margin Account?
You may have heard of margin accounts several times and wondered what they were and if you needed one. Basically, margin accounts give you greater flexibility for trading with your brokerage. However, the added benefits come with greater risks, so please read your broker ‘s agreements carefully. Benefit #1 – Borrowing Money There are three main benefits of having a margin account over a standard cash account. The first one is the ability to instantly borrow money from your brokerage in order to buy more shares than you could afford with just your cash. This is called leverage because it allows you to do more with less. Of course with the ability to gain much more, there is also the ability to lose that much more! Given that fact, it is generally not recommended to borrow very much money for trading. However, the borrowed money may also be used for a personal loan rather than trading. This is an easy way to get cash fast without a complicated loan application.
A margin account allows you to increase your purchasing power by borrowing against the securities deposited in your Firstrade account. To apply for a margin account, please select and print the Margin Application & Agreement from our Forms Download Center. Margin accounts require minimum equity of $2,000 pursuant to Regulation T of the Federal Reserve Board.
A margin account is an account offered by brokerages that allows investors to borrow money to buy securities. In a simplified example, 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. Important: Buying securities
A margin account is a trading account that has been approved for credit from the broker. If, for example, you desire to purchase 100 shares of ABC Company, the broker will match the amount of money you invest. So only the cost of 50 shares is deducted from your trading account and your broker lends the cost of the other 50 shares to you. In effect, on long positions (trades where you enter by buying the stock), you can purchase twice the amount of shares you could otherwise purchase using only your trade account money. So if you plan on trading $1,000 per position or trade, you can actually purchase $2,000 worth of stock per position. But keep in mind that the money used to purchase those additional shares is BORROWED MONEY. You will be charged a small interest rate and you will have to pay that money back.
