Margin Trading Considerations

E*TRADE Securities2

06/23/17

What exactly is margin?

Margin is a finance term for borrowed money, so “buying on margin” is the practice of purchasing securities with borrowed funds. A margin account, which must be approved by your broker, consists of your own cash and securities, along with margin buying power. In essence, the broker is loaning you funds to purchase additional securities, provided you keep a certain amount of cash and securities in your account as collateral, or the value of your portfolio does not decline below a certain point.

A margin account may offer you:

  • Increased buying power
  • Ability to execute more strategies concurrently
  • An opportunity to gain more from trades versus limited cash accounts

Cash accounts, and the pros and cons of margin

Cash accounts require that all purchases be paid in full, on or before the settlement date. This is usually the default account approved initially by most brokers.

If you’re thinking of upgrading to a margin account, you should also know the risks. Consider the following pros and cons:

Pros Cons

Increased buying power

New investors may not be prepared for the increased leverage

Greater access to trading strategies

Trading strategies that require greater funds may not be suitable for all investors

Ability to gain more from trades by taking on larger positions

Possibility to incur losses at a faster rate, and to lose more than the initial investment, including interest charges and commissions

Ability to leverage existing cash and marginable or margin eligible securities as collateral

Your cash and securities may be at risk should your margin account value fall below a certain minimum

Increased buying power may help you take advantage of opportunities in fast moving markets

In volatile markets, your positions can fall in value quickly, putting you at risk of liquidation

Access to additional trading funds by borrowing against your cash and marginable securities

Like any loan, you pay interest on margin funds

Possibility to maximize gains on your positions

Possibility of losing more funds than initially borrowed

 

Learn more about margin trading, or upgrade to a margin account.