A margin account is a brokerage account in which the customer can borrow cash from the broker to purchase stocks. The loan in the account is collateralized by the securities purchased and cash, and comes with a periodic interest rate. Because the customer is investing with borrowed money, the customer is using leverage which will magnify profits and losses for the customer.
If you choose to not use leverage on your margin account, there is no problem! Simply do not turn leverage ON, and your account will not be allowed to use leverage.
If an investor purchases securities with margin funds, and those securities appreciate in value beyond the interest rate charged on the funds, the investor will likely earn a better total return than if they had only purchased securities with their own cash. This is the advantage of using margin funds.
On the downside, the brokerage firm charges interest on the margin funds for as long as the loan is outstanding, increasing the investor’s cost of buying the securities. If the securities decline in value, the investor will have to pay interest to the broker on top of that.
If a margin account’s equity drops below the maintenance margin level, the brokerage firm will make a margin call to the investor. Within a specified number of days—typically within three days, although in some situations it may be less—the investor must deposit more cash or sell some stock to offset all or a portion of the difference between the security’s price and the maintenance margin.
A brokerage firm has the right to ask a customer to increase the amount of capital they have in a margin account, sell the investor’s securities if the broker feels their own funds are at risk if they do not fulfill a margin call or if they are carrying a negative balance in their account past the margin maintenance due date.
The investor has the potential to lose more money than the funds deposited in the account. For these reasons, a margin account is only suitable for a sophisticated investor with a thorough understanding of the additional investment risks and requirements of trading with margin.
In order to start trading with leverage, the investor must have at least $2,000 in equity on the stock account and answer a few questions through our platform in order to define the type of investor and the level of risk you are willing to add to your portfolio.
After the sale of an asset, you may use the proceeds from that same sale to purchase other assets on your stock account right away. However, you may see a difference between the value of Buying Power and the amount available for withdrawing, and that’s due to the fact that following a sale, your funds need to “settle” before you can withdraw them to your bank account. This is called regular-way settlement, which means your proceeds usually take two trading days (T+2) to be available for withdrawal. So on the third business day, assuming there are no holding periods due to the method of deposit you used, those funds will be available for withdrawal,
Please visit our Margin FAQ page for further information.