margin account

margin account definition - business

margin account

A brokerage account that permits an investor to purchase securities on credit and to borrow on securities already in the account. Buying securities on credit and borrowing on securities are subject to standards established by the Federal Reserve and/or by the firm carrying the account. Interest is charged on any borrowed funds and only for the period of time that the loan is outstanding. Also called general account. Compare cash account. See also initial margin requirement, maintenance margin requirement.

I plan to open a brokerage account in the near future. Is there a reason to choose a cash account rather than a margin account?

I think that the decision between a cash account and a margin account depends on the client's investment objectives, risk tolerance, and financial resources. By opening a margin account, you can borrow money from your broker to purchase securities, which creates leverage in your account. If the securities that you purchase go up in value, you can make more money than in a cash account. However, if the securities that you purchase on margin go down, you can lose more money than your original investment. If you use margin, you have to be very diligent in monitoring the price movement of your securities and be ready to act, or the outcome could be unpleasant.

Richard S. Campbell, CIMA®, Senior Vice President, Wealth Management, Portfolio Management Director, Smith Barney, Valdosta, GA

The American Heritage® Dictionary of Business Terms Copyright © 2009 by Houghton Mifflin Harcourt Publishing Company. Published by Houghton Mifflin Harcourt Publishing Company. All rights reserved.

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