What is a Margin Account?
The majority of individual investors in Hong Kong trade in cash, which means that they pay cash for the shares they buy and receive cash when they sell the shares. Unlike cash accounts, margin accounts allow the investor to trade on credit. Investors can trade in amounts larger than the deposits in their margin accounts. Securities companies provide the balance by way of loans to the investor and in return, keep the securities purchased as collateral. It is worth noting that because share values may fluctuate, margin client agreements authorize the securities companies to demand more collateral from their margin clients in case the value of the collateral falls below the level required to support a client’s trading activities. If a client fails to top up his / her deposit or collateral before the due date, the securities company has the discretion of exercising its right to clear the client’s debt by disposing of the securities in it’s account.
A margin account is a bond account. It is like a savings account. Before you can trade, you need to place a certain amount of money in what is called a margin account. You are guaranteeing other traders that you can pay them if you lose. That account is overseen by your broker. He monitors your account when you trade. He usually will not allow you to risk more than what is in your margin account. The margin account exists so, as you win on a daily basis, they have a place to deposit your money. Conversely, when you lose, they have an account to withdraw the money.
A margin account is an account you establish at a brokerage firm that lets you borrow from your broker. A margin account lets you take a secured loan against your own portfolio. The advantage is that you do not have to sell any of your portfolio to obtain the cash. Furthermore, you generally have no repayment schedule. You are free to repay the loan at anytime, unless your collateral falls below the required amount. While most traders use the borrowed cash to buy additional securities, you can use it for any purpose. However, the wholly owned securities in your portfolio are collateral for the loan.
You may have heard of margin accounts several times and wondered what they were and if you needed one. Basically, margin accounts give you greater flexibility for trading with your brokerage. However, the added benefits come with greater risks, so please read your broker’s agreements carefully. Benefit #1 – Borrowing Money There are three main benefits of having a margin account over a standard cash account. The first one is the ability to instantly borrow money from your brokerage in order to buy more shares than you could afford with just your cash. This is called leverage because it allows you to do more with less. Of course with the ability to gain much more, there is also the ability to lose that much more! Given that fact, it is generally not recommended to borrow very much money for trading. However, the borrowed money may also be used for a personal loan rather than trading. This is an easy way to get cash fast without a complicated loan application.
