The SEC`s Office of Investor Education and Advocacy publishes this Investor Bulletin to inform investors of the use of marginal accounts for the purchase of securities, including associated risks. A «margin account» is a kind of broker account in which the broker lends the investor cash to buy securities using the account. The margin increases the purchasing power of investors, but also exposes investors to the potential for significant losses. Here`s what you need to know about Margin. Margin purchases relate to the purchase of cash securities borrowed by a broker, with the securities purchased being used as collateral. The result is an increase in earnings or loss of securities. The securities are used as collateral for the loan. Net worth – the difference between the value of the securities and the loan – is initially the amount of use. This difference must remain above a minimum margin whose objective is to protect the broker from a loss of securities value so that the investor can no longer cover the loan. Merrill, Bank of America.
«Invest in margins.» Access on August 15, 2020. On the other hand, the brokerage calculates interest on marginal funds while the loan is pending, which increases the cost of the investor for the purchase of the securities. If the securities lose value, the investor will be underwater and will also have to pay interest to the broker. Suppose the share price drops to $85. The net worth is now only $5 (the previous net worth of $20 minus the $15 share price drop), so to obtain the broker`s minimum margin, Jane must increase that net worth to $10 or more, either by selling the stock or by repaying a portion of the loan. The margin equity rate is a term used by speculators, which represents the amount of their trading capital held at a given time as a margin. Traders would rarely (and unintentionally) hold 100% of their capital as a margin. There is a good chance of losing all their capital at some point. On the other hand, if the margina equity rate is so low that the trader`s capital corresponds to the value of the futures contract itself, they would not benefit from the inherent leverage that is implied in futures trading. A conservative trader could hold a margin rate of 15%, while a more aggressive trader could hold 40%. The broker may review the value of collateral (margin) at any time after the risk assessment, for example. B based on market factors.
If this results in the market value of the security of a margina account being covered by the revised margin, the broker or exchange immediately issues a «margin call» requiring the investor to reconcile the margin account. To do this, the investor must either deposit funds (the call) into the margin account, provide additional guarantees or sell a portion of the securities. If the investor does not reconcile the account, the broker can sell the investor`s security in order to reconcile the account. For FINRA`s margina account resources, please read the alert «Investment with Borrowed Funds: No «Margin» for Error and FINRA`s investor newsletters «Purchasing on Margin, Risks involved with Trading in a Margin Account» and «Understanding Margin Accounts, Why Brokers Do What They Do What They»