Margin Brokerage Account

A margin account with a brokerage firm allows brokerage clients to buy stocks at credit and from borrowing stocks to sell in short. In other words a margin account  allows you to buy stocks without having to pay the total price in cash. The difference between amounts is lent by the brokerage firm. The maximum percentage over the buying price that the client must borrow is determined by the margin requirements given by the Federal Reserve Board. Brokers can have more strict requirements for their clients.

Fro instance with a requirement margin of 50% in case of buying stocks for $12,000 you should have to deposit at least $6,000 in cash and would have to ask for a loan for the difference from the brokerage firm. If the margin requirement is 60% you should have to deposit at least $7,200 and borrow the difference.    

The brokerage firm uses the stocks as a collateral to the loan. These stocks are well kept under a street name and can be lent to other clients from the firm that are selling in short. The brokerage firm charges the margin investor interests over the amount loaned.

Risks are magnified in a margin trading because losses represent a greater portion of the invested money. However, if stock prices have a turn-up the return rate is greater for the margin investor than for the cash investor due that the latter has invested less money. In both cases the investor must pay interests over the margin loan increasing the loss and reducing slightly the profits.

If the stock prices turndown in a margin account the amount owed to the brokerage firm would be proportionally larger. In order to protect its position brokerage firms set a maintenance margin that is the minimum amount of capital that an investor must keep in its margin accounts. When the funds drop beyond the maintenance margin the broker sends the investor a margin call.

A margin call is a notification requiring from the investor deposit the additional money to comply with the minimum margin requirement. If the investor does not deposit the additional funds the brokerage firm can liquidate the stocks.

The investor is the most inclined to pay any loss that the brokerage firm incurs. Two types of transactions can be made only with a margin account: selling stocks short and writing uncovered stock options.

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