How to Make Online Investments in Margin Accounts – Guide
Margin trading, or “buying on margin,” means borrowing money from your brokerage firm and using that money to buy stocks. Simply put, you take out a loan, buy stock with the borrowed money, and usually repay that loan with interest at a later date. Buying on margin has serious appeal compared to using cash, but it’s important to understand that with the potential for higher returns comes greater risk. Margin trading is a form of leverage that investors use to increase their returns. However, if the investment does not go as planned, it means that losses can also be magnified. To buy a stock on margin, you must first open a margin account. This differs from a typical brokerage account, although many brokerages will automatically provide margin accounts unless you specifically say not to. Margin accounts must adhere to certain rules set by the Financial Industry Regulatory Authority (FINRA) and the Federal Reserve. These include a minimum balance of $2,000, a maximum borrowing limit of 50% of securities purchased, and an account holding limit of 25%, which is the minimum amount of money that must be held in a margin account with respect to share value. Brokers can set different minimum account balances, margins and alimony minimums as long as they are stricter than federal regulations.
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