For your consideration: Margin trading
E*TRADE from Morgan Stanley
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
- Increased leverage, which can enhance returns or magnify losses
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:
check Increased buying power to spot and seize potential opportunities
check Greater access to trading strategies, including a wide array of options strategies and access to pattern day trading capabilities
check Flexibility and time savings by leveraging existing cash and marginable or margin eligible securities as collateral
check Increased buying power may help you take advantage of opportunities in fast moving markets
check Access to additional trading funds by borrowing against your cash and marginable securities
block New investors may not be prepared for the increased leverage
block Trading strategies that require greater funds may not be suitable for all investors
block Possibility to incur losses at a faster rate, and to lose more than the initial investment, including interest charges and commissions
block Your cash and securities may be at risk should your margin account value fall below a certain minimum
block In volatile markets, your positions can fall in value quickly, putting you at risk of liquidation
block Like any loan, you pay interest on margin funds
block Possibility of losing more funds than initially invested