Margin Account

What Is a Margin Account?

A margin account is a type of brokerage account that allows you to borrow money from your broker to purchase investments. The borrowed funds are secured by the cash and securities you already hold in the account, which serve as collateral. This differs from a standard cash account, where you can only spend the money you have deposited. Using borrowed money to invest is called buying on margin, and it allows you to control a larger position than your own cash alone would permit, while also increasing both potential gains and potential losses.

How It Works

When you open a margin account, you agree to terms that set out how much you can borrow and what happens if your account value falls. Your broker charges interest on the loan, and that interest accrues for as long as the balance remains outstanding. The portion of a purchase that you pay with your own money is called the initial margin, and regulators and brokers set minimum requirements for it. Once you own the securities, your account must also maintain a minimum level of equity, known as the maintenance margin. If your equity drops below that level, the broker may issue a margin call, which requires you to deposit more cash or securities. If you fail to do so, the broker can sell positions in your account, often without prior notice, to bring the loan back into compliance.

Why It Matters to Investors

Margin can magnify returns when investments rise, but it magnifies losses equally when they fall. A decline in the value of your holdings reduces your equity by a larger percentage than the decline itself, because the loan amount stays the same. Interest costs also reduce returns over time. Margin accounts can be useful for short-term trading, for taking short positions, and for certain strategies that involve borrowing, but they carry risks that a cash account does not. Investors considering a margin account should read the broker's margin agreement carefully and understand how margin calls are handled before borrowing.