Explanation :Margin accounts are set up by brokers to allow their clients to borrow money from them in order to make an investment in the stock market. These accounts are risky because they are collateralized by the client’s equity. This means that any losses the client experiences on the securities he purchases through the loan can affect their own equity, even the one outside the account.Margin accounts charge an interest rate on the borrowed funds and demand a maintenance margin, which is a fixed percentage of the total account’s equity. This margin is the least amount of money that is required to be available in the account calculated as total equity value minus current borrowed funds.If the maintenance margin goes below the fixed percentage, the broker can issue a margin call, which means the account holder must provide new funds within a pre-established time frame or the broker can sell some of the securities without the holder’s approval to increase the maintenance margin to adequate levels.
In a nutshell :
- A margin account allows a trader to borrow funds from a broker, and not need to put up the entire value of a trade.
- A margin account typically allows a trader to trade other financial products, such as futures and options (if approved and available with that broker), as well as stocks.
- Margin increases the profit and loss potential of the trader's capital.
- When trading stocks, a margin fee or interest is charged on borrowed funds.