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:

What to read next...

Read this article to understand some of the considerations to keep in mind when trading on margin.

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