MARGIN ACCOUNTS

​

Margin accounts are brokerage accounts in which a broker dealer makes a loan to the account holder to finance the purchase of stocks or other financial products. The loan in the account has as collateral the account holdings. A portion of the account is funded by the account holder, and is referred to as the equity in the account.

​

Margin loans charge interest as determined by the broker dealer at which the account is held.

​

If the value of assets held in a margin account decreases, the broker dealer will usually call for more collateral in the form of margin (a “margin call”). 

 

Maintenance margin is the minimum amount of equity that an investor must maintain in his margin account and its minimum is currently set by exchanges and regulators at 25% of the total value of the securities. Margin requirements also depend on the amount of equity and the type of assets held in an account.

​

Margin maintenance and calls are important risk features for investors to understand. Unmet margin calls may lead to the liquidation of assets held as collateral in the account, usually by the end of the day in which the margin call is issued.  Market sell offs may be further exacerbated by widespread liquidation of margin positions, some times at heavily discounted prices.

​

Stocks and liquid assets can be borrowed from market dealers via margin accounts, as a key step in initiating short positions. (see short selling)