An account that permits borrowing against securities, enabling leverage, short selling and immediate reuse of sale proceeds, in exchange for collateral rules and liquidation risk.
Under regulation-t the initial requirement for US equities is 50%, with maintenance-margin of at least 25% and usually higher house rules. The borrowed portion accrues margin-interest daily.
Opening one also permits rehypothecation of the collateral securing your debit, brings pattern-day-trader-rule obligations into play, and exposes you to forced liquidation without notice if equity falls below requirement.
Example: $50,000 of cash buys $100,000 of stock with a $50,000 loan. A 25% decline leaves $75,000 of stock and $50,000 of debt: equity is $25,000, or 33%, still above a 30% house requirement. A 35% decline leaves equity of $15,000 on $65,000 of stock, 23%, and triggers a call for roughly $4,500.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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