Why Margin account?
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Margin Account (with $2000+ equity): Offers maximum flexibility as you are permitted to reuse your funds before they settle.
Example: If sell stock A on Monday, permitted to then buy stock B with the proceeds as early as Monday and then sell stock B as early as Monday, Tuesday or Wednesday.
- Cash Account: Offers minimum flexibility as you are not permitted to sell a stock until the sale proceeds used to afford it have settled. Reminder: stock trades take Trade Date +
2 business days to settle.
Example: If sell stock A on Monday, then should wait until Wednesday to use the proceeds to buy stock B. However, if buy stock B on Monday or Tuesday with the proceeds of the sale of stock A, then required to wait until Wednesday to sell stock B..
What is margin trading?
A margin account offers leverage with your investment funds. With a margin trading account, you can borrow funds from your brokerage firm and use them for trading.
In this section, you will get to know what a margin trade is, how buying power works, as well as day trading and short selling requirements.
Margin can be an important part of your investing strategy. However, first it is very important to understand how margin works, and the rules governing a margin account.
A margin account offers leverage with your investment funds. With a margin account, you can borrow funds from your brokerage firm and use them for trading. Why would you want to do this? It allows you to make a larger trade, thereby increasing the potential gains from the position—and also increasing the potential losses.
Simply put, in a margin account you put up your own money, say $5,000, you borrow $5,000, and you buy $10,000 worth of stock. If the stock rises 10%, you make a 20% return. Conversely, if the stock falls 10%, you lose 20%. And if the stock falls 80%, you lose 160%, meaning you lose 60% more than you had when you initiated the position. The extra loss happened because the stock value isn’t enough to pay back your loan from the brokerage firm, and yet you still have a legal obligation to repay the loan—regardless of what happened with the stock price. As your brokerage firm, we are the lender and we charge interest for the loan. You are the borrower and you bear all responsibility for losses.
Traders use margin trading to borrow on their assets for a variety of reasons, including to increase their buying power and to purchase additional marginable securities. It can be a cost-effective way to take advantage of market opportunities without affecting your cash flow. However, margin trading also presents an increased risk of loss, and a margin account must always be carefully monitored.