What is a margin account?
Margin trading allows you to borrow money from a broker to conduct trading of various types, such as stocks, bonds, options and contracts for difference (CFDs). Your existing position, such as in shares, is used as security. To trade on margin, you need a margin account.
Where have you heard about margin accounts?
You may have heard of the film Margin Call, starring Kevin Spacey and Stanley Tucci. It’s a fictional account of what happens when investment firms over-leverage, and margin accounts become worthless. Trading Places, starring Eddie Murphy and Dan Aykroyd, explores similar themes.
What you need to know about margin accounts...
Once a margin account is up and running, you can borrow up to 50% of the purchase price of a stock. But this opening position is called the initial margin. The second type is known as the maintenance margin, which describes any additional funds that may have to be paid into the account to make up for a decline in the value of the assets being held as security.
Buying on margin is mainly used for short-term investments because of the interest charges. Margin works well when your investments are going up in value but can be crippling if the value goes down.