The Truth About Margin Accounts
Like banks lend you credit carts to buy commodities or to do shopping similarly your broker gives you credit in form of margin accounts to buy stocks. In return your investment is kept as collateral, which the broker passes on to a creditor for the repayment of the load.
The psychology behind margin accounts is similar to owning a credit card which means the investor wants to own the thing before actually paying in full for it. This facility allows the investor for greater gain, but at the same time it exposes the investor for greater losses.
The investor is responsible for the credit borrowed from the broker along with interest payment on it. You must have a certain amount of assets in your account as collateral for the loan.
The federal government states that the investor needs to have at least 50% of the amount borrowed, so for example if you borrow $1000 from your broker than you should have assets worth $500 in your account to be kept as collateral. This is called the minimum maintenance requirement. The margin requirement varies from one broker firm to another, while some may keep it at 30% while others at 35%. The broker firms may also change the margin requirements and interest on margin accounts from time to time, the duty of the investor is to be informed about the same.
Furthermore, there would be certain shares that may not be available on margin. If your balance goes down than the minimum maintenance requirement then you have to either add cash or sell some securities to up to the balance.
Margin account on a whole requires the investor to be more responsible and alert at the same time. So if an investor is up for high gain, high responsibility and high risk then margin accounts are the right deal for him or her.