If there’s one thing that can increase an investor’s buying power, it’s leverage. Leveraged trading, done in margin accounts, allows investors to use funds borrowed from their brokerage firm to buy more assets than their current balance affords. The positions purchased on margin act as collateral for the loaned funds, and a small amount of interest is charged on the outstanding loan amount. While margin trading can kickstart growth, it also carries risks, so read on to decide if it’s right for you.
How Margin Accounts Work
A margin account differs from a cash account in that it gives investors the ability to make trades that exceed their balance of available cash. By providing at least the required percentage of cash (generally 50 percent), investors can leverage the margin loan to buy twice as much stock as they could otherwise. For example, an investor with $10,000 in a margin account could buy up to $20,000 in securities without having to deposit additional funds.
The Benefits and Drawbacks of Margin Accounts
Margin accounts open up many more trading possibilities than traditional cash accounts. Investors can trade certain types of options in a margin account, sell short, and even day trade. When using a margin account for leveraged trading, there is always the possibility that the value of the leveraged positions will rise, potentially allowing the investor to liquidate a portion of the position and use the proceeds to pay back the margin loan.
Of course, investments don’t always go up in value, which brings us to one of the risks of margin trading: margin calls. When the margin account balance falls enough that the outstanding margin loan exceeds a certain percentage (usually ranging from 30%-75%, depending on the margin requirement for the portfolio held in the account. See more information here.) The brokerage will issue a margin call asking the investor to deposit enough cash or other assets to bring the account’s balance back up to the required minimum level.
Unfortunately, since we can’t time the market, margin calls can hit when investors are least prepared to meet them. When an investor can’t meet the call, some or all of their securities may be sold. Therefore, before you apply for a margin account, make sure to read through the margin risk disclosure statement to understand the risks that might occur.
Advantages to the Firstrade Margin Account
While most margin accounts give you the benefits of increased profit potential, better diversification, and more trading options, Firstrade goes several steps further, offering margin accounts with no application or closing fees. Our margin accounts feature a relatively low margin interest rate and a flexible line of credit that can be withdrawn for other uses, such as an automobile purchase, doing home renovations, or paying for trips, weddings, tuition, and more. Firstrade margin loans are repaid quickly and easily through ACH, ensuring you avoid paying extra fees. ACH can also be used to swiftly meet margin calls.
It’s easy to start trading on margin and using your new account to day trade, trade sophisticated option strategies, and short sell. Simply click here to open a new account and apply for margin privileges.
Already have a Firstrade brokerage account? Then just login to your account and apply!