Candlestick Trading Blog
|A margin account is a brokerage account in which the broker lends the investor the cash to purchase securities. When buying stocks on margin you use leverage in order to increase your gains, however if you are not careful you can increase your losses as well. Trading on margin is a great tool for experienced investors to use but it is very risky.
If you decide you open this type of account instead of a regular trading account, there are some terms that you should know. First, the initial margin is the amount that you may borrow for those securities that may be purchased on margin. This can be up to 50% of the purchase price of these securities however some brokerage firms require more than 50% of the purchase price. This rule is according to Federal Reserve Board.
The minimum margin, according to the Federal Reserve Board, requires that you deposit with your brokerage firm a minimum of $2,000 or 100% of the purchase price, whichever is less. There are those firms however that requires the investor to deposit more than $2,000.
There is also the maintenance margin which is the amount of equity that must be maintained in a margin account. For the New York Stock Exchange and the NASDAQ, after an investor has bought securities on margin, the minimum required level of margin is 24% of the total market value of the securities in the account. This is a minimum however and many brokerage firms have an even higher maintenance requirement ranging from 30 to 40%.
For those investors who are new to margin trading it is important to recognize the risks involved. You have to understand that you can lose more money than you have invested and that you may have to deposit additional cash or securities in your account in order to cover market losses. Additionally, you may be forced to sell some or all of your securities when decreasing stock prices reduce the value of your securities. Your brokerage firm may also decide to sell some or all of your securities without out working with your first to pay off the loan that was made to you.
You must ensure that you know how a margin account works and what happens if the price of the stock that you purchased on margin falls. You should know what you firm charges for the interest on borrowed money and how that will affect your return on investment. You must also know what a margin call is and what that means to you. Before you begin trading on margin ensure that it fits in with your investment goals, your risk tolerance and your financial resources.
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