What is a margin account and what are
the risks of using one?
A margin account has a portion of available
funds which finance a portion (usually
half) of a stock trade. Use of the margin
portion of your brokerage account is
usually optional. Using margin can provide
higher net returns if your percentage
return is higher than the interest paid
for using the margin.
Margin usage does carry risks, however,
and is not recommended until you are
very familiar with the risks it involves.
If your stock were to drop significantly
in value, your brokerage firm has the
right to demand that money be added
to the account to cover for their potential
loss. With a margin purchase, your brokerage
firm has financed a portion of your
stock and you are liable for the consequences
of that stock's performance. If your
brokerage demands that funds be added
to your account to cover your margin
purchase and you cannot fulfill their
request, your stock will be sold and
potentially all of your investment capital
of the transaction would be lost. Please
trade responsibly and consult your broker
for advice and guidance.
Please see The
Characteristics and Risks of Standardized
Options for more information. |
