In addition, your brokerage company may charge you a commission on the transaction or transactions. You are responsible for all losses incurred during this process and your brokerage company may liquidate enough shares or contracts to exceed the initial margin requirement. For these reasons, a margin account is only suitable for a demanding investor with a thorough understanding of additional investment risks and trading requirements with Margin. Merrill, Bank of America. “Invest in margins.” Access on August 15, 2020. You can keep your loan as long as you like, provided you meet your obligations, such as. B the one-time payment of interest on borrowed funds. If you sell the stock to a margin account, the proceeds will go to your broker against the repayment of the loan until it is fully paid. A brokerage company has the right to ask a client to increase the amount of capital he has in a margin account, to sell the investor`s securities if the broker feels that his own resources are threatened, or to sue the investor if he does not fill a margin call or if he has a negative balance in his account. Consumer Financial Protection Bureau. “What is the index and margin for a mortgage with an interest rate (ARM) and how do they work?” Access on August 15, 2020.
Margina accounts are also needed for most options trading strategies. Variety mortgages (MRAs) offer a fixed interest rate for an introductory period, and then the interest rate adjusts. To determine the new interest rate, the Bank adds a margin to an established index. In most cases, the margin remains the same for the duration of the loan, but the index rate changes. To understand this more clearly, imagine a mortgage with an interest rate has a margin of 4% and is indexed in the cash index. If the cash index is 6%, the interest rate of the mortgage is the index rate of 6% plus the margin of 4%, or 10%. Buying on Margin is borrowing money from a broker to buy shares. You can imagine it as a loan from your broker. Margin Trading allows you to buy more shares than you normally can buy. To act on Margin, you need a margin account. This is different from a regular cash account in which you deal with the money in the account. There is also a restriction called the maintenance margin, which is the minimum balance you need to maintain before your broker requires you to deposit more money or sell shares to repay your credit.
If this happens, it is called “Margin-Call.” A margin call is actually a requirement of your broker to allow you to add money to your account or close positions to get your account back to the required level. If you don`t complete the margin call, your brokerage firm can close all open positions to bring the account back to its minimum value. Your brokerage company can do this without your consent and can choose which positions to liquidate. Suppose an investor with $2,500 in a margin account wants to buy Nokia shares for $5 per share.