Basically, margin accounts are simply an account whereby the broker/dealer is permitted to lend you monies secured by a deposit of your stocks, bonds, and mutual funds.
The initial maximum allowable amount of the loan is limited by Federal Reserve mandates to 50% of the market value of the assets at the time the margin loan is initiated.
Once the loan is made, there are no restrictions placed on how the proceeds may be used by the recipient. The proceeds can be used to purchase additional financial assets, pay educational expenses, for car expense, for vacations, or for any other expense.
There is no particular stated time frame for repayment of the margin loan, and the loan can stay outstanding indefinitely. Or, the loan can be repaid in full or partially at any time by the recipient. Should the underlying assets decrease in value by a certain fixed percent while the loan is outstanding, a portion or the total loan amount will be called for immediate repayment.
Given the relatively attractive interest rates charged on these margin loans relatively to other types of loans available to borrowers, sometimes this method of borrowing is quite attractive for your financial needs.
Margin trading accounts are offered by various broker/dealers via their specific margin agreement forms.
Margin trading account interest rates vary and they are typically based on the size of the debit and the current interest rates available in the market.
Not all stocks, bonds and mutual funds are marginable and available as assets for borrowing purposes.
The assets in margin trading accounts are covered up to $100,000 via SIPC, plus many broker/dealers offer additional coverage up to $25,000.000 plus per account.
Broker/Dealer margin trading accounts are not FDIC insured.
Broker Dealers who participate in SIPC coverage limit coverage to $500,000 including $100,000 for cash; this coverage does not protect against any market losses.
The use of margin, also know as borrowing against stocks, bonds, mutual fund, is inherently far more risky that the outright purchase of those instruments and should only be undertaken by experienced and totally informed sophisticated investors who fully understand these risks.
Investing in stocks, bonds, mutual funds and variable annuities does not guarantee a profit.
All of these investments can lose money.
