What is a margin account?

• A. A margin account allows traders to borrow funds from a brokerage to purchase more securities than they could with their own cash.
• B. A margin account is where brokers hold cash deposits only with no lending.
• C. A margin account guarantees profit on every trade.
• D. A margin account is a retirement savings account.

Answer: (A)

Margin accounts involve using borrowed funds from a broker to buy more securities than you could with your own cash. You deposit cash or securities, the broker lends you additional money, and your investment is secured by the assets in the account. You pay interest on the borrowed amount and must maintain a minimum level of own-money, or equity, in the account. If the market drops and your equity falls below that minimum, you may receive a margin call asking for more funds or securities, or the broker may liquidate holdings to cover the loan. This setup provides leverage: potential for larger gains, but also larger losses, including the possibility of losing more than your initial investment. It’s not simply holding cash with no lending, it does not guarantee profits, and it isn’t a retirement savings vehicle.