Arrangement with a broker or financial institution permitting a customer to borrow in order to cover the cost of investment purchases.
Margin accounts are brokerage accounts that allow you a much wider range of transactions than cash accounts.
In a cash account you must pay for every purchase in full at the time of the transaction. In a margin account, you can on margin, sell short, and purchase certain types of derivative products.
Before you can open a margin account, however, you must satisfy the firm's requirements for margin transactions. You must also agree in writing to the terms of the account, and make a minimum deposit of at least $2,000 in cash or qualifying securities.
If you buy on margin or sell short, you pay interest on the cash or the value of the securities you borrow through your margin account and must eventually repay the loan.
Because both types of transactions use leverage, they offer the possibility of making a substantially larger profit than you could realize by using only your own money.
But because you must repay the loan plus interest even if you lose money on the investment, using a margin account also exposes you to more risk than a cash account.
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