If a customer chooses to borrow funds from a firm, the customer will open a margin account with that firm. The portion of the purchase price that the customer must deposit is called margin and is the customer's initial equity in the account. The loan from the firm is secured by the securities that are purchased by the customer. Customers generally use margin to leverage their investments and increase their purchasing power. At the same time, customers who trade securities on margin incur the potential for higher losses; therefore, customers should make sure they clearly understand this concept before opening a margin account and entering the investing arena. For more information, including a specific example, click here.
Where can I get more information?
We have published guidance and other information for members and investors on the issue of online investing, as well as information about what to look out for when investing in general.
General Investor Information
View investor guidance on purchasing on margin and risks involved with trading in a margin account. Learn what margin and margin requirements are; also see an example of how this type of trading works and learn the risks of investing this way.
Guidance To Investors Regarding Stock Volatility And Online Trading
Before opening an online account or placing the first trade, investors should ask brokerage firms a number of questions so they can make appropriate investment decisions. Online investors need to be aware of the potential for stock market volatility, the possibility of delays due to high Internet traffic or high trading volume, and the difference between market and limit orders.