In a stock trading brokerage account, what is margin?

Question

What can I do with it? How does it help my buying power?

Answer 1

Margin is borrowed money. You can use it to buy stocks when you have funds that are unsettled.

Answer 2

Margin is debt. You borrow the brokerage's money to buy securities like stocks and bonds.

Margin purchases amplify your wins or losses. If your stocks go up in value, your earnings are amplified because you did not have to use all your own money to buy them. You can use some of the profits to pay back the loan and then keep the rest. However, if your stocks go down in value, not only have you lost value but you must still pay back the loan. Buying on margin means you are speculating about the direction in which stock prices will move. It is a gamble. Investing involves none of this.

Big margin purchases of stocks in 1929 pushed stock prices too high in the utlities section of the market. This is one of the factors that set the stage for the greatest market crash in U.S. history which then lead to the great depression.

Investors who bought on margin panicked when the Fed raised interest rates. Brokerages asked these investors to deposit more money into their accounts to cover some of the margins, since interest rates went up. Investors who bought on margin did not have the actual cash to cover these calls, since their money was in the stocks themselves. So, they had to quickly sell their stocks to get the cash. This massive selloff caused stock prices to plumet and set off a wave of panic which made the situation worse. Over the next 4 years, large-cap stocks lost about 80% of their value and a generation of investors were scared away from stocks. It would take many years before the general public would once again trust the market.

Just thought you should know a piece of our countrie's greatest financial calamity, which was partially caused by margin purchases.

Answer 3

The answers you've received are interesting and to some degree correct.

Margin (in the uneducated and/or greedy) can be a tool that leads to ruin.
Margin (leverage) is a great tool when used properly.

Most brokers will allow you to buy up to 50% more stocks (no cash) then you have in your account. They will use your current holdings as collateral. This is called a "magin account". Margin can also be used to buy Mutual Funds, Bonds etc.

I use margin two ways.
A. More leverage.
B. Buy stock today when I might not have the cash in the account for a day (or more) past the alloted settlement date.

Answer 4

Margin is money you borrow from your broker to buy stocks. Your stockbroker will charge you interest on your loan, usually about 10% a year. You must provide collateral in the form of cash or stocks you own. You must also have a "margin account" with your broker, that is, you must sign a agreement in which you acknowledge the risks in trading on margin.

Answer 5

It is a loan by a stockbroker. You pay a percentage of the cost of a stock assuming that its rise in value will cover the interest.

The stock market crash in 1929 was caused by too much margin and no one being able to cover the loans when stock value went down. It is now tightly controlled.

Answer 6

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Answer 7

Most firms allow you to trade with account equity. This includes cash and settled trades (which produce cash) plus the marginable portion of the securities in your account.

Answer 8

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Answer 9

You're essentially borrowing money to buy stocks. Very dangerous. If your stocks go down and they call in your account (want the loan paid), you are up sh*t creek.

Answer 10

1) Credit.
2) Money.
3) If you have $2,000.00 USD then you can buy $4,000.00 USD or if you have $2,000,000.00 USD then you can buy $4,000,000.00 USD