Margin Account

What Is Margin Account?

A margin brokerage account is an account that is approved to borrow money from a broker in order to purchase securities. A margin account holder pays interest on any loans they take. As well, they must maintain enough assets in the account to cover a percentage of unrealized losses.

Borrowing from the broker allows the account holder to leverage positions to amplify gains and diversify investments. However, the risk of losses is also amplified at the same rate as the potential gains.

Often, a margin account is allowed to borrow up to half of the initial purchase of a security. The interest rate paid on the loan is determined by the broker but is typically less than credit card rates and other unsecured personal loans. Payments on the loan usually occur monthly, as deductions from the account and the loan can be repaid at any time.

If the value of the security drops, a maintenance margin must be met. Maintenance margins are often between 30% and 35% of the amount borrowed, depending on the securities and the brokerage.

If the equity in the account does not meet the maintenance margin, a margin call from the broker will notify the account holder how much equity must be added to the account to meet the maintenance margin. This is achieved by adding cash to the account or selling securities.

How a Margin Account Works

For example, imagine an investor has $30,000 in a margin account and he believes the price of company XYZ’s stock will rise from $10 a share to $15 a share in the next month. The investor could buy 3,000 shares using all the cash in his account, which would prevent him from making other investments, or he could use a margin loan from the broker to buy half the shares with his own funds while he buys the other half on margin, leaving him with $15,000 cash in the account.

If the price of the stock rises to $15 and he exits at the end of one month, his profit is $5 per share. The loan is repaid when the stock is sold and $1,500 is added to his account. Interest for the period the loan existed is deducted from the account at the broker’s rate. The interest rate paid on the loan is determined by the broker, but it typically less than credit card rates and other secured personal loans. At the time of this writing, the rate for a well-funded margin account can be twice the prime rate, e.g. if the Prime Rate is 5%, interest on the margin loan would be close to 10%.

However, if the price of the stock drops by $5 a share, his total equity in the position is now only $15,000. If the maintenance margin of the account is 30%, and the account holder still has $15,000 cash in the account he meets the maintenance margin because the $15,000 is 50% of the original purchase and more than the minimum 30%.

But, if the $15,000 has been withdrawn or lost from the account, the account is below a 30% maintenance margin. In this case, a margin call from the broker notifies the account holder that $4,500 must be added to the account, i.e., $15,000 x 30% = $4,500. If the account holder does not meet the margin call, the broker can liquidate securities in the account to bring the account into good standing by repaying the principal and interest on the loan.

Another way for the account holder to meet the margin is by borrowing against other securities in the account that have not been margined. In the example above, if the $15,000 cash was invested in other securities a margin loan of $4,500 could be taken from other equity to satisfy the margin call. This new loan would be added to the original $15,000 loan and the appropriate interest would be deducted each month.

Finding Margin Account Information At Investing.com

The Brokers tab on the homepage of Investing.com provides a list of major brokers available for multiple investment categories, including Forex, Cryptocurrency, Futures, and Options. Filters are available on the left side of the screen, including a margin percentage rate for accounts with at least $25,000.