Margin account

Also called Buying on margin

A brokerage account that lets an investor borrow from the broker to buy securities, using the account’s holdings as collateral.

What it means

With a margin account, the broker lends money against the investments in the account and charges interest on the balance. Borrowing adds leverage: gains and losses are both magnified relative to the investor’s own money. Margin accounts are also required for some strategies, such as short selling and certain options trades.

Federal rules and brokers set initial requirements, and brokers set maintenance requirements, the minimum equity that must stay in the account. If falling prices push equity below that level, the broker can issue a margin call or sell holdings without notice, often at bad prices. Losses can exceed the amount originally invested, leaving the investor owing the broker money.

Example

Suppose an investor puts in $10,000 and borrows $10,000 to buy $20,000 of stock. A 20% rise makes it $24,000, or $14,000 of equity, a 40% gain; a 20% drop makes it $16,000, or $6,000 of equity, a 40% loss. At 8% interest the loan also costs $800 a year.

How it’s used

Borrowing to increase exposure to an investment
Short selling or certain options strategies
Short-term borrowing against a portfolio instead of selling

Strengths and weaknesses

Strengths

Can magnify gains when investments rise
Gives quick access to credit without selling holdings
Required for some trading strategies

Weaknesses

Magnifies losses, which can exceed the money invested
Interest costs reduce returns
Margin calls or forced sales can lock in losses during downturns

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.