What Is a Margin Account?
A margin account is a brokerage account that allows investors to borrow money or securities from their broker. This gives investors more flexibility than a standard cash account, but it also introduces additional risk.
Many investors associate margin accounts with borrowing money to buy more stock than they could otherwise afford. While that is one common use, margin accounts are also required for strategies such as short selling because investors must borrow shares before selling them.
When you borrow through a margin account, your investments act as collateral for the loan. As the value of your investments changes, so does the amount of equity you have in your account.
If the value of your account falls below the brokerage's minimum requirements, the brokerage may issue a margin call. A margin call is a request to deposit additional cash or securities into your account to restore the required level of equity.
If you don't meet the margin call, the brokerage has the right to sell investments or close positions without your permission to reduce its risk. This can happen even if you believe the market will eventually recover.
It's also important to understand that each brokerage sets its own margin requirements. While regulators establish minimum standards, brokerages may require customers to maintain higher account balances depending on the investments they own or current market conditions.
Margin accounts can be useful tools for experienced investors, but they also increase both potential gains and potential losses. Borrowing money or securities magnifies risk, which is why margin investing is generally not appropriate for everyone.
Understanding the difference between a margin account and a margin call can make financial news much easier to follow. A margin account is the type of account that allows borrowing. A margin call is what may happen if the value of that account falls below the broker's required level.
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