Meaning Of Margin Account
A margin account is a type of trading account that allows traders to borrow funds for purchasing securities. Although many traders use margin accounts as a part of their investment strategy, it involves a lot of debt, extra costs as well as much more risk. Purchasing on margin allows professional traders to make huge investments with fewer funds. Read More
Margin loans come with interest, and a decline in the value of securities purchased with a margin loan would need you to pay the loans back at very urgent notice. Since margin accounts are risky, and hence buying on margin should be done by experienced traders only. The best thing about a margin account is that it enhances the trader’s purchasing power, making them buy much more securities than they could with their initial capital. Many traders use the margin account to access credit facilities from regulated forex broker. In this way, they are able to buy additional securities (known as leverage).
However, margin accounts carry additional risk, and traders may incur significant losses if the market moves against them, causing your entire trading balance to wipe out instantly. Hence, your balance will reach beyond the minimum balance requirements. This is when the brokers may make “margin calls” to the traders asking for additional funds to keep the account running.
Many margin traders get regular “margin” calls from the brokers to deposit additional funds when their balance in the account declines below the required levels. Generally, the forex brokers allows a time period of two to five days for meeting the call. These calls are usually based on the account value at market close, as numerous regulations require evaluating the traders’ account at the end of the day. The “close” followed by most brokers is 4:00 p.m., Eastern time.
Opening A Margin Account
When the crypto broker approves any margin account, they provide a credit line to the trader to invest in forex, stock, commodities and bonds. The securities bought and the cash deposited act as collateral for the loan taken. Although margin loans don’t have any outlined repayment plan, the traders are required to keep a particular amount in the account, which is known as maintenance margin. Financial regulators set these maintenance margins; sometimes, individual brokers can also set their own minimum balance requirements, which are generally higher than those set by the financial regulators.
Interest Charges
It is indeed true that money does not grow on trees. Therefore, just like any other loan, margin loans charge interest too. Consequently, this return minimizes your return on investments. The interest rates can vary from one broker to another. Thus, you should carefully evaluate this expense before you open a margin account with any broker.
Also read : Meaning Of Forex Trading and How It Works?
Benefits Of Using A Margin Account
Some of the best benefits of a margin account are discussed below:
- Leverage Allows Traders To Make Huge Investments:
Buying on margin lets traders leverage their investments’ value and purchase more. Thus, it can increase the potential profits by allowing you to diversify your investment portfolio in ways you would not have imagined.
- Margin Loans Provide You Access To Cash:
Margin loans aren’t restricted to purchasing investments. You could also utilize them to fund your purchases outside of the investment world.
- Prevents You From Selling When The Market Is Down:
In case you require immediate cash from your account, but do not wish to sell your investments at a loss, a margin loan is a good option. Many traders take out money from their margin account to cover their short-term requirements and pay the loan back when the market conditions improve.
- Flexible Repayment Schedules:
Unlike other loans, you can pay a margin loan whenever you can as long as you can maintain the collateral limit in your brokerage account. Although you will have to pay back the amount plus the interest, there’s a lot more flexibility when it comes to when you want to pay.
- Risk Of A Margin Account:
A margin account also contains a good amount of risk as you leverage your investments. Here are the risks you need to consider when you buy on margin:
- Your Losses Can Be Magnified:
Just like margin can bring in more profits, it can also magnify your losses in case the market takes a downward trend. If you have a cash account, only your investment will fall to zero. However, if you have a margin account, not only does your investment fall to zero, you will also owe the remaining margin loan and its interest.
- You Might Get A Margin Call:
In case the value of the securities falls too far, you might need to sell your securities to bring your account again to the margin threshold. The broker might even sell investments without giving you any notification.
