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What is a Margin Account?

Updated on August 6, 2022 , 301 views

The brokerage account, through which, the investor borrows money from the broker to invest in equity can be defined as the margin account. The borrower could use the securities they purchase as Collateral. It involves a regular interest rate. Basically, the margin account is used to lend the investor funds that they can use to buy securities. The securities purchased using the borrowed money can prove profitable for the investor if the value of the securities appreciates over time.

Margin Account

For a successful margin investment, the value of the securities must go beyond the interest charged on the margin funds. If that happens, the borrower can make higher profits with the margin funds than if they purchase the stocks using their savings. The major drawback of the margin account is that the lender charges a fixed interest on the total amount until you don’t repay the loan in full. That means the more securities you add to your Demat account, the higher the interest you will pay to the broker.

If the value of the securities declines over time, you will end up with no profit. Furthermore, you are going to have to pay interest to the broker. When the equity in your margin account falls below the maintenance limit, you will have to sell the existing stocks or deposit more funds into the margin account to counterbalance the maintenance level. Note that the broker who has lent the margin funds gets full control over your margin account and investment decisions. They could ask the investor to sell certain stocks, increase the total Capital, and deposit more funds. They can even sue the borrower if the latter has a negative balance in their margin account.

Understanding Margin Account

The investor who is using the margin funds can suffer a loss that goes beyond the amount they had invested in the equity and securities. A margin account is, therefore, recommended only for experienced and professionals investors that have a better understanding of the margin funds and the risks it carries. Trading with borrowed money is not a great option for beginners. That’s because a successful investment requires knowledge of the stock Market.

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Even futures investors can open a margin account. The margin maintenance requirements could vary from broker to broker. Usually, these requirements are established by the regulatory bodies. However, the brokerage firm can make changes to the minimum margin maintenance level. For example, the futures margin maintenance level is lower than that of stock and other securities.

Suppose you have a margin account with INR 18,4064. You plan on buying 1000 shares of a company valued at INR 368 per share. You can borrow funds from a broker to make an investment of INR 3,68,128. If the value of this share increases to INR 736 per share, you will make INR 7,36,256 from the sale of these shares. Let’s say you borrowed INR 1,84,064 from the broker for this investment. After repaying this amount, you will make a profit of INR 3,68,128.

Disclaimer:
All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.
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