This is called the maintenance margin or the maintenance requirement, which mandates at least 25% of the assets held in your margin account be owned by you outright. Maintenance marginĪfter you’ve purchased securities on margin, you must maintain a certain balance in your margin account. This can effectively double your purchasing power: If you have $5,000 in your margin account, for example, you could borrow an additional $5,000-letting you buy a total of $10,000 worth of securities. Once you start buying on margin, you are generally limited to borrowing 50% of the cost of the securities you want to purchase. FINRA mandates you have 100% of the purchase price of the investments you want to buy on margin or $2,000, whichever is less. Minimum Marginīefore you start buying on margin, you must make a minimum cash deposit in your margin account. They set minimum guidelines, but your brokerage may have even higher requirements. Margin accounts have a few additional requirements, mandated by the SEC, FINRA and other organizations. And the securities you buy in a margin account serve as collateral for your margin loan. You can take as long as you need to repay your loan, though you will continue to accrue monthly interest charges. Margin loans generally have no set repayment schedule. According to Brian Cody, a certified financial planner with Prudent Financial in Cedar Knolls, N.J., margin interest rates are about three to four percentage points higher than what would be charged for a home equity line of credit. Margin rates vary by firm, and they can be high. For instance, if you’re paying 8% APR on a margin loan, your investments would have to increase by at least 8% before you break even-and only then would you start to realize a net gain. Trading on margin, then, is essentially betting that the stocks you purchase will grow faster than your margin interest costs. You are charged interest on a margin account loan. A margin account gives you more options and comes with more risk: You get additional flexibility to build your portfolio, but any investment losses may include money you’ve borrowed as well as your own money. With a margin account, you deposit cash and the brokerage also loans you money. For this reason, cash accounts are the better choice for new investors. If you invest $5,000 in a stock, the most money you can lose is $5,000. Notably, with a cash account, your potential losses are always capped to the amount you invest.
If you’d like to buy more, you have to deposit additional funds in your account or sell some of your investments. If you’ve deposited $5,000, for example, you can purchase up to $5,000 in securities. How Does a Cash Account Work?Ī cash account allows you to purchase securities with the cash in your account. This extra complexity can make them risky for beginners. Margin accounts extend you a line of credit that lets you leverage your cash balance. With a brokerage cash account, you can only invest the cash that you have deposited in your account. Both help you buy things and provide easy access to money, but debit card purchases are limited by the cash balance in your bank account while credit cards lend you money to buy more than the cash you have on hand-potentially much more. It’s a bit like the difference between a debit card and a credit card. When you apply for a new brokerage account, one of the first choices you need to make is whether you want a cash account or a margin account. Choosing a Brokerage Account: Cash vs Margin Account We’ll tell you what you need to know about cash accounts and margin accounts, and help you decide which is right for you. Both allow you to buy and sell investments, but margin accounts also lend you money for investing and come with special features for advanced investors, like short selling. Online brokers offer two types of accounts: cash accounts and margin accounts.
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