What Is A Margin Account?

A cash account allows you to buy stocks such as stocks and bonds using only the amount you have, while a margin account allows you to borrow money from a broker to buy more stocks than you can buy with cash alone. Suppose a brokerage account is like a debit card that only allows you to purchase securities with the amount you already have. In that case, a margin account is like a credit card: you can buy securities with borrowed money and then repay the credit. Time. Buying on margin involves taking a loan from your broker and using the funds from the loan to invest in more securities than available liquidity.

By buying margin, investors can increase their profits, but only if their investment exceeds the loan’s value. The most considerable risk of buying on margin is that you could lose a lot more money than you originally invested. Even if you don’t invest money, you may be subject to a margin call if the assets you use as collateral fall in value.

If an account is losing too much money due to underperforming investments, the broker will issue a margin call asking you to deposit more funds or sell some or all of the assets in your account to pay off the margin loan. When holding securities on margin, if the value of the shares falls significantly, the account holder will have to deposit more cash, more margined securities, or sell some of the securities to meet minimum margin requirements. In addition, you can use the margin to finance the purchase of shares or borrow shares already held in your account.

Using a margin account, you can use the securities in your account as collateral for a loan to pay the exercise price of your options. Similarly, you can often borrow against marginal stocks, bonds, and mutual funds already in your account. For example, suppose you have $5,000 worth of margin shares in your account and have not yet borrowed against them. In that case, you can buy another $5,000 – the shares you already own provide a guarantee for the first $2,500, while newly acquired margin shares provide a second $2,500 guarantee.

This time, you use your $10,000 buying power to buy 200 shares of $50 stock—you use your $5,000 in cash and borrow another $5,000 from your brokerage firm as margin. Using your cash and a $10,000 investment loan, you can buy $20,000 worth of stock. You borrow 100 shares from a broker and sell them for $40 or $4,000 per share.

Let’s say you deposit $5,000 in cash and borrow $5,000 in the margin to buy 100 shares at $100 per share, for a total of $10,000. So if you want to buy $10,000 worth of shares, you can invest $5,000 of your assets and use margin credit to purchase additional $5,000 shares for a total investment of $10,000. For example, if you have $5,000 in cash in an approved brokerage account with a margin, you can buy shares up to $10,000 on margin – you will pay 50% of the purchase price. Your brokerage firm will provide you with the remaining 50%. . In this scenario, the unrealized gain is $2,500 versus $1,250 if you hadn’t invested on margin and only bought as many shares as possible with the money you had (50 shares for a total of $5,000).

If you use margin to buy securities in these accounts, keep in mind that activity-based commissions are generally based on the value of all securities in the account, excluding the debt used to buy securities on margin. Borrowing the assets in your account is called a margin loan, and the interest rate may be lower than an unsecured loan. Suppose the value of the securities in your margin account falls. In that case, the value of the collateral backing your loan will also fall, so we may take action, such as issuing a margin call and selling the securities in any of your accounts. We maintain the required balance in your account. If you have a Visa(r) card and check in your account, you may also be charged a margin fee if the withdrawal (via Visa, check, pre-authorized debit card, FTS or other transfer) exceeds any credit limit. Free and available cash account balances (bank balances or money market funds).

If you already have an RBC Direct Investing Cash account and would like to add margin to your account, download and complete the Margin Agreement Form. Once your account has been approved for Margin Loan, you can apply for Margin Loan at any time without any additional forms or requests. Borrowing on margin can be relatively quick and easy, and the loan can have a lower interest rate than conventional unsecured credit accounts. In addition to using a margin loan to buy more shares than investors have cash in their brokerage account, there are other benefits.

Some margin accounts allow brokerage firms to lend securities in the account to a third party at any time without needing to notify or compensate the account holder if the investor has an outstanding margin loan in the account. However, you can use these stocks as collateral for margin loans with a margin account. So, to get a loan, you need to meet the “Initial Margin Requirement” – the rule that you can only borrow up to 50% of the purchase price of your total investment. Depending on the current value of your account, you may need at least 50% equity and 25% equity when taking out a margin loan.

Additionally, the funds in your account must have a certain value, called maintenance margin. Once you buy shares on margin, you will need to maintain a certain amount of equity in your account at all times; this is called the maintenance margin requirement. Regulatory minimums require investors to hold 25% of the total market value of their securities, but intermediaries can, and often do, set higher minimums. Your brokerage firm will require you to hold a certain percentage of shares in your account, depending on the type of securities you have and whether you borrow money to buy additional shares or sell them short.

Your account may be subject to higher margin requirements depending on how market volatility affects your portfolio. For example, your account may be subject to margin requirements if the value of securities you use as collateral for margin loans falls below the minimum maintenance requirement. When this happens, your brokerage firm will ask you to immediately deposit more cash or margin securities into your account to meet the minimum equity requirement. As a result, you are now at risk of a margin call. In addition, the brokerage firm may ask you to deposit more funds into your account to meet the minimum requirement, or the brokerage firm may even sell your stock to cover the difference without notifying you.

Also Read:

Margin Account vs Cash Account

How to Buy Stocks in Canada

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