Margin account

A margin account is one that an investor holds with a broker, effectively allowing him to buy securities on credit. When the investor wishes to trade, he need only pay a certain percentage of the total value of the securities he is purchasing. The balance is borrowed from the broker, whose collateral is the value of the shares held in the account.

The minimum amount that must be held in the margin account is referred to as the margin requirement. This kind of arrangement works well for the investor when markets are rising as they are effectively leveraging their gains.

However, if the prices of the securities in the portfolio start to fall, the opposite is true. To cover the cost of borrowing from the broker, the investor may have to sell some of his securities. Worse still, he may get what is referred to as a margin call. If the price of an equity in the portfolio has fallen, then so has the broker’s collateral, and he may want to reduce the value of the loan he has made to keep the account within its margin requirements. During the collapse of the tech bubble, many investors were unable to meet their margin calls.

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