So – what is a margin account?
If you are new to investing, you need to know the definition of margin.
A margin account increases your buying power by a certain amount. In essence, the brokerage is loaning you money.
Let’s use 5:1 as an example. If you open a margin account with $1000, your buying power will be $5000.
Now that may seem like a beautiful thing. And it can be…if every investment you make goes in the right direction.
What I mean by this is the following: Let’s say you buy XYZ Corp at $50, and it goes to $100. With a margin account, that’s fantastic, because you made 10 times your money! But let’s take the other side. Say the stock falls to $25. At that point you would probably be forced to sell, and lock in the loss, due to something called a margin call. A margin call is when your position moves a certain number of percentage points against you, and the broker closes the position on their behalf to protect their money. It’s very possible in this scenario that you owe them money afterwards.
I have never used a margin account for that very reason.
What if the stock then went from $25 to $200? You would have missed the entire move. If you’d had a cash account you could have just been patient and waited.
If I can’t pay cash I don’t wanna buy it…and neither should you!
My book, The Stock Market is For Everyone, is a short guide for the beginning, inexperienced investor that is easy to understand and can be put into action immediately.
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