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Related to Margin account: margin call, short selling
Margin account (stocks)
A margin account provides the flexibility to borrow funds using your securities as collateral. This can be an advantage if used properly. Funds from a margin loan can be used to purchase other securities, or they can be utilized for consumption. The risk is that a decrease in the market value of the account can create a "margin call," which requires the deposit of additional securities, the deposit of cash, or the liquidation of some securities held in the account.George Riles, First Vice President and Resident Manager, Merrill Lynch, Albany, GA
Margin accounts are brokerage accounts that allow you a much wider range of transactions than cash accounts.
In a cash account you must pay for every purchase in full at the time of the transaction. In a margin account, you can buy on margin, sell short, and purchase certain types of derivative products.
Before you can open a margin account, however, you must satisfy the firm's requirements for margin transactions. You must also agree in writing to the terms of the account, and make a minimum deposit of at least $2,000 in cash or qualifying securities.
If you buy on margin or sell short, you pay interest on the cash or the value of the securities you borrow through your margin account and must eventually repay the loan.
Because both types of transactions use leverage, they offer the possibility of making a substantially larger profit than you could realize by using only your own money.
But because you must repay the loan plus interest even if you lose money on the investment, using a margin account also exposes you to more risk than a cash account.