What is a margin account?

The term margin account refers to a brokerage account in which a trader's broker-dealer lends them cash to purchase stocks or other financial products. The margin account and the securities held within it are used as collateral for the loan. It comes with a periodic interest rate that the investor must pay to keep it active.

Can a margin account be used to buy stocks?

A margin account may not be used for buying stocks on margin in an individual retirement account, a trust, or other fiduciary accounts. In addition, a margin account cannot be used with stock trading accounts of less than $2,000. Financial products, other than stocks, can be purchased on margin.

Why are margin accounts riskier than cash accounts?

In other words, your loss is not limited to the value in your account. This makes margin accounts riskier than cash accounts. Margin accounts may also come with unexpected margin calls, where a firm requires you to pay up because your equity in the margin account has fallen below the maintenance margin.

What is margin trading?

Margin trading is a form of leverage, which investors use to magnify their returns. However, if the investment doesn’t go as planned, that means losses can be magnified, too. » Learn more about the differences. Margin accounts vs. cash accounts