How to Open a Margin Account

A margin account allows investors to purchase more stocks than they could purchase with the money that they actually have invested. A margin account is much like a loan, because the brokerage that you are using is basically loaning you money to purchase more stocks than you could buy with a cash account. If you think that you'd like open a margin account, here are some tips to help you get started.

Things You'll Need

• At least $2,000 to invest
• Relationship with a brokerage

Instructions

1. 

   The first thing that you will need to do is to have $2,000 to invest. The minimum amount for any brokerage to open a margin account is $2,000 and some brokerages have much higher limits. You'll need to check with the brokerage that you would like to use what their requirements are.

2. 

   Next, you will want to talk to your financial planner, or broker, about your plans to open a margin account. Your broker will provide you with an agreement that you will have to sign before you can open a margin account. Read your agreement carefully and understand all of it before you open your margin account.

3. At the time that you open your margin account you will also be required to specify your investment goals. You may be looking for income growth or aggressive growth. Understand that your investment goals will play a large part in the way that your funds are invested, so make sure you are comfortable with the risk.

4. Understand that there are only certain stocks that can be purchased with a margin account. These are regulated by the Federal Reserve Board. Brokerages are allowed to set even stricter limits on what their clients may and may not purchase with margin accounts.

5. Initially, you will be to borrow money to purchase up to 50% of the total price of the stocks that you will be purchasing. This is what is called a minimum margin. Your brokerage may have different rules, but these rules are set by the NYSE and NASD.

6. Once that your margin account is in operation, you will still be required to keep some of your own money in your account. The NYSE and the NASD both require you to have at least 25% of the market value of your holdings at all times.

7. 

   Before trading on margin, understand what a margin call is. 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 by making a deposit, or 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's important that you understand the risks associated with this.

Tips & Warnings

• As with all investing, talk to a qualified professional before making decisions about the best options to meet your goals.

• Only invest with well established and respected brokerages.