Margin account

From Academic Kids

A margin account is a brokerage account that can hold both deposited cash and securities, and also allows for borrowing funds from the broker-dealer to purchase additional securities with.

Margin accounts allow purchasing more securities than the value deposited into the account, and therefore are a form of leverage. Due to the leverage, if the value of the securities in the account were to fall to zero, the account holder would owe the broker dealer the value of the borrowed funds. In order to avoid the situation where the account owner owes the broker funds they don't have, a certain minimum value is required to be in a margin account at all times. In order to not fall below the minimum equity requirement in an account, a margin call is made if the equity in the account falls below the level called the maintenance margin.

In futures, the margin is the amount of funds that must be kept in an account to initiate or hold a contract overnight.

History

Loose margin requirements in the 1920's where very little capital was required to be deposited to borrow money to purchase securities in a margin account was at least one contributing factor bringing in the Great Crash, which in turn is thought to have contributed to the Great Depression.

External links

Margin (http://www.tradingeducators.com/resources/glossary_i.htm#M/)

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