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Margin

What is a Margin Account?
A Margin Account allows you to:

  1. Borrow funds while using the marginable securities you have in your account as collateral.
  2. You can purchase additional securities without paying for them in full. When using margin to purchase securities, a portion of the cost (usually 50%) is deposited, while the rest is loaned to you.

What are the advantages of having a Margin Account?

  1. It provides you with access to funds at interest rates that may be lower than standard bank or credit card loans.
  2. No lengthy approval process—all you need is a signed Margin Agreement along with sufficient marginable securities in your account, and the cash is yours.
  3. You can use your security as collateral and still benefit from capital gains, dividends or interest payments.
  4. No established repayment term. Your loan can remain outstanding for as long as you wish once the value of the securities used as collateral does not fall below the required minimum level.
  5. Increased purchasing power of securities transactions
  6. Short selling for potential profits.

How does Margin Work?

 

 

 

Investor A Investor B
Investable Assets $5,000 $5,000
Invests In: XYZ Stock XYZ Stock
Stock Price $10 per share $10 per share
Uses Credit Advance No Yes
Buying Power $5,000 $7,500 ($5,000 Investable Assets plus B can borrow up to $2,500 using Credit Advance)
Stock Purchase 500 shares 750 shares

If  XYZ stock price were to increase by $1 per share

Unrealized Profit $500 $750
Return on Investment 10% 15%

What are the Risks involved?
While Margin Trading does increase the potential for profit, it also increases the potential for loss.

In a cash account, your risk is limited to the amount of money that you invested. In a margin account, your risk includes the amount of money you have invested plus the amount that has been loaned to you.

 

How do you reduce the risks associated with Margin?

  • Borrow less than the full loan value of your securities. You still enjoy the benefits of leveraged buying power and low cost borrowing. This way, you pay off more of your purchase and lessen the chances of your account falling below required margin levels during market fluctuations.
  • Maintain a diversified portfolio. A mix of conservative investments can lessen, but not eliminate, the risk of loss.

Borrowing on margin is not for everyone and careful consideration of your personal investment objectives, your financial situation, and your tolerance for risk must occur. You can contact one of our Advisors for more information on this facility and the procedure for accessing it.

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