Margin Account

With a margin account, an investor can buy more securities than their cash alone would allow. The broker lends the rest and charges interest on the borrowed amount.

For example, an investor with 10,000 in a margin account might buy shares worth 20,000, borrowing 10,000 from the broker. If the shares rise 20% to 24,000, the investor’s equity rises from 10,000 to 14,000, a 40% gain before interest. If the shares fall 20% to 16,000, their equity falls to 6,000, a 40% loss.

Margin accounts must maintain a minimum level of equity, called maintenance margin. If losses push equity below that level, the broker issues a margin call, requiring the investor to add cash or sell investments. If the investor does not respond, the broker can sell investments without further warning.

Margin accounts are also needed for short selling and some options strategies. Because borrowing magnifies both gains and losses, margin trading is risky, and losses can exceed the original investment. Regulators set minimum requirements for margin lending.