Margin Account Definition with Example
Definition of Margin Account – An account in which the brokerage firm lends money to the investor to buy the securities or stock.
In simple words, it is the investor’s account with the brokerage firm in which the firs provide the loan money to him. This money is lend to the investor in order to purchase the securities. For opening a margin account, investor has to approach and appoint a registered broker. This account is needed when investors goes for margin trading. Once the investor register itself with a brokerage firm, the broker do all the work related to opening up of margin account. The brokers requires the signature and consent of the investor to open this account.
For availing the loan, investor has to collateralise the securities or cash. This is because the investor is not using his or her money but of brokerage house. So, if any default case happens, the broker house is able to recover its losses. Margin trading provides the leverage facility to the investor that is they can invest more money than they actually have. This results in magnifying both gains as well as losses.
The most important thing to note about Margin account is that, an investor has to keep a certain sum of cash in this account. The amount of cash may vary from securities to securities. Buying stock on margin with higher risk have higher minimum margin requirement.
Margin Account Example
Let’s discuss an example in order to understand the concept more clearly. Let’s assume, you have Rs. 10,000. The share of ABC company is trading @1000. So if you are having a normal trading account, you can purchase only 10 shares. On the contrary, if you go for Margin trading, then with same amount of money an investor can purchase more than ten shares of the company and hence also magnify his or her gains.
Related Financial Terms of Margin Account
- Margin Trading
- Bottom Up Budgeting
- Margin Call
- Financial Leverage
- Book Value
- Generally accepted principles (GAAP)
- Accounts Payable
- Accounts Receivable