Margin account

Margin account (stocks)

A leverageable account in which stocks can be purchased for a combination of cash and a loan. The loan in the margin account is collateralized by the stock; if the value of the stock drops sufficiently, the owner will be asked to either put in more cash, or sell a portion of the stock. Margin rules are federally regulated, but margin requirements and interest may vary among broker/dealers.

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margin account

A brokerage account that permits an investor to purchase securities on credit and to borrow on securities already in the account. Buying securities on credit and borrowing on securities are subject to standards established by the Federal Reserve and/or by the firm carrying the account. Interest is charged on any borrowed funds and only for the period of time that the loan is outstanding. Also called general account. Compare cash account. See also initial margin requirement, maintenance margin requirement.

Are there any advantages to opening a margin account as opposed to a cash account?

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

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Margin account. 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.