Investors who have stepped into the field of trading need to understand what margin accounts for and how it is beneficial to investors. It is a brokerage account that lets the investor borrow money from the broker to buy more securities and to gain at an exponential rate.
For example, you have $3000 shares of company ABC with a face value estimated at $5 per share. In a traditional brokerage account, you will be able to buy 600 shares. But if the analysts predict that the share price is about to rise by $10, what would you do? Well, you can borrow money from the brokerage firm.
The standard margin requirement for equity is 2 to 1, which means the equity investor can purchase double of whatever the cash balance. Taking the example forward, with $3000 the investor with a margin account would be able to buy $6000 shares of the company at the same price which would mean a gain by $300.
But margin trading is a double-edged sword, and as the gains are huge so are the losses. Furthermore, if the investor equity in the account drops to a certain level (maintenance margin), the brokerage firm may ask you to deposit some money in cash or sell shares to offset the difference. Another flaw of this kind of trading is that the firm may sell investor security without prior notification or may sue the investor for not fulfilling the margin calls. Hence, margin accounts are meant for risk-aggressive investors who understand the risks behind operating the account.
It is important to thoroughly read the margin contract before signing the agreement, as it will help you to know the details minutely including the risks associated with it.