The risks and regulations of margin accounts

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Investors generally use margin to leverage their investments and take advantage of a greater range of trading strategies in an effort to increase their purchasing power. At E*TRADE, a margin account requires margin equity of at least $2,000, and consists of cash plus the market value of marginable securities in the margin account.

The investor must agree to the rules and regulations of a margin account in order to open it. An investor may be able to purchase securities using margin. By using qualifying securities or cash as collateral, the investor can borrow money to meet initial margin requirements of a transaction or withdraw money. The investor pays interest on the money that is borrowed in the margin account, and must eventually repay the loan. A margin account also offers a greater range of trading strategies, such as selling stocks short and trading options; however, because of the leverage associated with this type of account, a margin account also carries more risk than a cash account.

Learn more about the requirements and regulations of cash accounts

Margin account risks and regulations

While a margin account gives you the ability to own twice as much stock, which is a great opportunity, there are some things to consider before you jump in.

1.     A customer can lose more funds than the initial deposit into the margin account

A decline in the value of securities that are purchased on margin may cause a customer to lose money, requiring them to provide additional funds or close out positions to avoid the forced sale of those securities or other securities in the account.

2.     The firm can force the sale of securities in a customer’s account

If the equity in a customer’s account falls below E*TRADE margin requirements then, E*TRADE can sell securities in the account sufficient enough to cover the margin deficiency. The customer will also be responsible for any shortfall in the account after such a sale.

3.     The firm can sell a customer’s securities without contacting the customer

Some investors mistakenly believe a firm must contact them for a margin call to be valid, and they cannot liquidate securities in their accounts to meet the call unless the firm has contacted them first. This is not the case. As a courtesy, E*TRADE will, whenever possible, make a best effort attempt to notify their customers of margin calls, but is not required to do so.

4.     Customers are not entitled to an extension of time on a margin call

While under some circumstances a customer may be granted an extension of time to meet initial margin requirements, E*TRADE is under no obligation to grant the customer such an extension.

It is important that investors take time to learn about and understand the risks and restrictions involved in trading securities on margin. Let E*TRADE help you with your margin trading needs. Open an account to start margin trading with E*TRADE today.