Margin account

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A margin account is a brokerage account in which the broker may lend the customer cash to purchase securities, known as purchasing on margin. The loan in the account is collateralized by the securities and cash in the account. An investor might put down 50% of the value of a purchase and borrow the rest from the broker. The broker charges the investor interest for the right to borrow money and uses the securities as collateral.[1]

If the value of the stock drops sufficiently, the account holder will be required to deposit more cash or sell a portion of the stock.[1] This is known as a margin call. When opening a margin account, it is important to understand all the terms and conditions of how the account operates.

Margin requirement

A margin requirement, also known as a maintenance margin, is the minimum amount of equity that must be maintained in a margin account.[2]

Additionally, the Investment Industry Regulatory Organization of Canada (IIROC) sets minimum standards based on the price of a stock. Your discount broker may impose more stringent requirements in certain situations.[3]

Margin call

Some investors mistakenly believe that a firm must contact them for a margin call to be valid and that the firm cannot take action in the account to meet the margin call unless the firm has contacted the client first. This is not the case.[4]

Securities lending

If you are using margin, your broker has the right to lend your securities, up to the amount borrowed. Brokers who are members of the Canadian Investor Protection Fund (CIPF) are required to segregate all fully paid securities. Conversely, if any of your securities are not fully paid, the Member is lending you money to purchase those securities and is entitled to use them as collateral.[5]

See also

References

Further reading

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