A margin account allows investors to purchase more stocks than they could purchase with the money they have actually invested. A margin account is much like a loan, because the brokerage you are using is basically loaning you money to purchase more stocks than you could buy with a cash account. If you would like to open a margin account, following a few tips are necessary to get started.
Have $2,000 to invest. This is the minimum amount for any brokerage to open a margin account and some brokerages have much higher limits. You will need to check with your brokerage for its requirements.
Talk to your financial planner or broker, who will provide you an agreement to sign. Read it carefully and understand it thoroughly before opening the account.
Specify your investment goals at the time you open the account. This is a requirement. Whether you seek income growth or aggressive growth, understand that your investment goals will play a large part in the way your funds are invested; thus, ensure you are comfortable with the risk.
Understand you can purchase only certain stocks with a margin account — all Federal Reserve Board-regulated. Brokerages are allowed to set even stricter limits on what their clients may and may not purchase with margin accounts.
Maintain a minimum margin. Initially, you can borrow money to purchase up to 50 percent of the total stock price. This is what is called a minimum margin. Your brokerage may have different rules but the NYSE and NASD sets the rules.
Maintain some of your own money in your account, once it is in operation. Both the NYSE and the NASD require you to have at least 25 percent of the market value of your holdings at all times.
Understand the meaning of a margin call. If the price of stock drops and your margin falls below the required maintenance margin, you will be required to make up that money very quickly with a deposit; otherwise, your brokerage will have the right to sell some of your investments to get your account back to the maintenance margin. This happens when the price of stocks has fallen so it is important that you understand the associated risks.