How does a margin account work?

How a Margin Account Works. Also, a maintenance margin is required meaning a minimum fixed dollar amount must be maintained in the account to be allowed to trade on margin. The minimum margin amount is calculated by subtracting the borrowed amount from the account's total equity which includes both cash and the value of any securities.

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 happens if a margin account declines in value?

If the securities decline in value, the investor will be underwater and will have to pay interest to the broker on top of that. If a margin account’s equity drops below the maintenance margin level, the brokerage firm will make a margin call to the investor.

Can I use a margin account 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.