Trading on margin involves additional risk, so before placing any trades, be sure you understand the requirements and industry regulations that govern margin borrowing. Show
A margin account is essentially a loan made by a brokerage firm to an account owner. To add margin to your account, you'll need to first complete a margin agreementLog In Required that confirms your understanding of the risks involved. Once margin has been added to your account, its subject to the rules of the Federal Reserve Board, the Financial Industry Regulatory Authority (FINRA), and securities exchanges such as the New York Stock Exchange, as well as your own brokerage firm's margin policies. In many cases, a brokerage firm's margin policies may be more stringent than those of the regulators. To purchase securities on margin and continue to hold them in your margin account, you must meet specific margin requirements. Initial margin requirementFor new purchases, the initial Regulation T margin requirement is 50% of the total purchase amount. So if you wanted to buy $10,000 of ABC stock on margin, you would first need to deposit $5,000 or have equity equal to $5,000 in your account. Margin accounts require a minimum of $2,000 in net worth to establish a long stock position. House margin requirementFINRA Rule 4210 requires that you maintain a minimum of 25% equity in your margin account at all times. Most brokerage firms maintain margin requirements that meet or, in many cases, exceed those set forth by regulators. They do this to protect themselves from market risk and the risk that certain customers will incur a margin debt that they are unable to pay back. Firms typically determine margin requirements by assessing risk at the security level or at the account level. Calculating requirements at the security level takes into account a security’s price, volatility, and number of outstanding shares, along with many other factors. This information is used to create a single margin requirement across the firm. The main benefit of this method is the simplicity in maintaining and communicating this information to customers. Calculating margin requirements at the account level may provide a more accurate and true representation of risk. This method goes beyond the individual security level characteristics and analyzes risk and the corresponding margin requirements based on each customer's overall account structure. The criteria used to assess this risk may vary from broker to broker, but generally firms use factors such as account concentration, security liquidity, ownership concentration, industry concentration, and a security's volatility. Additional factors pertaining to certain securities, such as leveraged ETFs or those from distressed sectors and issuers, could increase the house requirements for these securities. These requirements can change at any time, so be sure you understand your firm's unique margin policies before you start trading on margin. Margin requirements in actionLearn more by watching How margin requirements work in practice (1:59). Understanding the potential benefits, risks, and requirements of maintaining a margin account is just the first step in getting started with margin. Before you proceed, you also need to know what can happen when the market moves against your margin positions. For more on this topic, see Avoiding and managing margin calls. Next steps to considerOpen an account and add margin Model hypothetical trades and the impact on margin balances. Understand the advantages and risks of margin borrowing.  Send to (Separate multiple e-mail addresses with commas) Please enter a valid e-mail address Your E-Mail Address Please enter a valid e-mail address Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: " Your e-mail has been sent. Your e-mail has been sent. What Is a Margin Account?A margin account is a brokerage account in which the broker lends the customer cash to purchase stocks or other financial products. The loan in the account is collateralized by the securities purchased and cash, and it comes with a periodic interest rate. Because the customer is investing with borrowed money, the customer is using leverage which will magnify profits and losses for the customer. Key Takeaways
Click Play to Learn All About Margin AccountsHow a Margin Account WorksIf an investor purchases securities with margin funds and those securities appreciate in value beyond the interest rate charged on the funds, the investor will earn a better total return than if they had only purchased securities with their own cash. This is the advantage of using margin funds. On the downside, the brokerage firm charges interest on the margin funds for as long as the loan is outstanding, increasing the investor’s cost of buying the securities. If the securities decline in value, the investor will be underwater and will have to pay interest to the broker on top of that. If a margin account’s equity drops below the maintenance margin level, the brokerage firm will make a margin call to the investor. Within a specified number of days—typically within three days, although in some situations it may be less—the investor must deposit more cash or sell some stock to offset all or a portion of the difference between the security’s price and the maintenance margin. A brokerage firm has the right to ask a customer to increase the amount of capital they have in a margin account, sell the investor’s securities if the broker feels their own funds are at risk or sue the investor if they do not fulfill a margin call or if they are carrying a negative balance in their account. The investor has the potential to lose more money than the funds deposited in the account. For these reasons, a margin account is only suitable for a sophisticated investor with a thorough understanding of the additional investment risks and requirements of trading with a margin. A margin account may not be used for buying stocks on margin in an individual retirement account, a trust, or other fiduciary accounts. In addition, a margin account cannot be used with stock trading accounts of less than $2,000. Margin on Other Financial ProductsFinancial products, other than stocks, can be purchased on margin. Futures traders also frequently use margin, for example. With other financial products, the initial margin and maintenance margin will vary. Exchanges or other regulatory bodies set the minimum margin requirements, although certain brokers may increase these margin requirements. That means the margin may vary by broker. The initial margin required on futures is typically much lower than for stocks. While stock investors must put up 50% of the value of a trade, futures traders may only be required to put up 10% or less. Margin accounts are required for most options trading strategies as well. Example of a Margin AccountAssume an investor with $2,500 in a margin account wants to buy Nokia's stock for $5 per share. The customer could use additional margin funds of up to $2,500 supplied by the broker to purchase $5,000 worth of Nokia stock, or 1,000 shares. If the stock appreciates to $10 per share, the investor can sell the shares for $10,000. If they do so, after repaying the broker's $2,500, and not counting the original $2,500 invested, the trader profits $5,000. Had they not borrowed funds, they would have only made $2,500 when their stock doubled. By taking double the position the potential profit was doubled. Had the stock dropped to $2.50, though, all the customer's money would be gone. Since 1,000 shares * $2.50 is $2,500, the broker would notify the client that the position is being closed unless the customer puts more capital in the account. The customer has lost their funds and can no longer maintain the position. This is a margin call. The above scenarios assume there are no fees, however, interest is paid on the borrowed funds. If the trade took one year, and the interest rate is 10%, the client would have paid 10% * $2,500, or $250 in interest. Their actual profit is $5,000, less $250 and commissions. Even if the client lost money on the trade, their loss is increased by the $250 plus commissions. What must be signed to open a margin account?Read Your Margin Agreement
To open a margin account, your broker will have you sign a margin agreement. The margin agreement may be part of your general brokerage account opening agreement or may be a separate agreement.
How do I open a margin trading account?Getting started with margin trading. Open a TD Ameritrade account.. Make sure the “Actively trade stocks, ETFs, options, futures or forex” button is selected.. Fund your account with at least $2,000 in cash or marginable securities.. Keep a minimum of 30% of your total account value as equity at all times.. When customers open margin accounts when must they be provided with a risk disclosure document quizlet?When customers open margin accounts, when must they be provided with a risk disclosure document? 1) Before initially opening the account & 4) Annually. The risk disclosure document is required before opening the account and annually after opening the account.
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Which of the following must be signed by a customer wanting to open a margin account?
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