Securities
Margin Account
A margin account is a brokerage account that allows investors to borrow money from the broker to purchase securities, using the account assets as collateral.
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Exam Tip
Reg T = 50% initial margin. FINRA = 25% maintenance. Know margin call calculations!
What is a Margin Account?
A margin account allows you to borrow money from your broker to buy securities. Your existing securities serve as collateral for the loan. This provides leverage but also increases risk.
Margin Requirements
| Requirement | Amount | Description |
|---|---|---|
| Initial Margin | 50% | Minimum to buy on margin (Reg T) |
| Maintenance Margin | 25% | Minimum equity to maintain (FINRA) |
| Minimum Equity | $2,000 | Required to open margin account |
How Margin Works
Example:
- You have $10,000 cash
- Broker lends you $10,000 (50% margin)
- You buy $20,000 in stock
- If stock rises 20%: You gain $4,000 (40% return on YOUR money)
- If stock falls 20%: You lose $4,000 (40% loss on YOUR money)
Margin Call
A margin call occurs when your equity falls below the maintenance requirement. You must:
- Deposit more cash or securities, OR
- Sell securities to reduce the loan
Margin Interest
You pay interest on the borrowed amount. Rates vary by broker and loan size, typically prime rate + 1-3%.
Risks of Margin
- Amplified losses - Losses are magnified just like gains
- Margin calls - May be forced to sell at a loss
- Interest costs - Eats into returns
- No control over timing - Broker can sell without notice