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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
Trouble brews in B&M as bargain shops take a hitOpinion Once a stock market darling, B&M's share price has slumped. What has gone wrong for bargain shops?
-
US and China reach a ceasefire in their trade war after talks in LondonThe US and China's trading relationship – the most important one in the global economy – is back on track. Will the truce last?
