Margin account

A margin account is an account which an investor has with a brokerage. Any loan which is granted to the investor by the brokerage is done by way of this account. Even if the investor does not have a sufficient amount on hand to purchase securities, he may still do so by using the margin account afforded to him.

There are limits to the amount that may be borrowed on margin. This is usually half the value of the security to be purchased. Margin accounts are often used by investors, not because they can’t afford to purchase the security with their own cash, but because of a strategy known as leveraging. Although interest is charged on the amount owed by the investor to the broker, the rates of such interest fees are usually quite low, which still gives the investor enough advantage.