What is a margin loan?

margin loan or margin account is a loan provided by an intermediary house to a client who allows the customer to buy shares on a loan. The date of the margin itself concerns the difference between the market value of the shares purchased and the amount borrowed from the mediation. The interest on margin loan is usually calculated for an excellent balance per day and charges to the margin's account. Over time, outstanding debt is rising and interest fees accumulate. Broaching also holds securities as a collateral for a loan. Another $ 5,000 would be provided by brokerage as marginal loans.

If you want to trade on a margin, the first thing you needed is an open account on the edge. According to the law, this requires an initial investment of at least $ 2,000. However, this amount could be more, depending on the intermediary's own rules to open the account. This amount is called "minimum margin". Once your account isOpen, you can borrow up to 50% of the price of any stock you want to buy. Understand, you do not have to borrow a full 50%; The amount you borrow can be less than 50%. 50% "deposit" is called your initial margin. As long as the stock prices remain stable or rising and you make interest payments, your life will walk smoothly.

However, you must be aware of what is called "maintenance" in terms of stock prices. According to the rules of the New York Stock Exchange (NYSE), anyone who buys shares on a margin must maintain at least 25% of the total market value of the securities that are on the margin's account. Some brokers require an even higher percentage.

The falling Shaceny Re could take your account below the minimum threshold and the mediation house will require you to insert more cash or securities to increase your share to a minimum. The brokerage call requiring these incremental funds is called the "call on the edge". Depending on the terms of the agreement on margial loans, KTYou have originally signed with brokerage, they may even have the legal right to sell securities from your account without consulting you, getting back to a minimum maintenance.

Undoubtedly, margin accounts allow the investor to get control of a large block of shares with a minimum investment. Sophisticated investors will use marginal loans to increase their personal wealth by means of a "leverage" provided by borrowed money.

However, if shares prices are incorrectly, the investor with margin lending is not only responsible for borrowed money, but also maintains a minimum of their margin. Now the lever works the opposite way and the Falling price prices in combination with an outstanding margin can cause significant financial problems with the investor.