Glossary
Buying on Margin
Borrowing from a broker to hold more shares than the cash in the account would pay for, with the account itself as collateral.
A margin account is a loan facility attached to a brokerage account. The broker lends against the value of what is already held, charges interest on the balance, and holds the securities as security for the loan. It has to be applied for separately, and a plain cash account cannot do it.
Borrowing changes the size of the outcome in both directions at once. A position twice as large moves twice as far on the same percentage change in the price, and the interest accrues either way. The loan is owed in full whatever the shares did, which is the difference between money borrowed and money already held.
It also introduces an event a cash account does not have. If the collateral falls below the level the broker requires, the broker can ask for more cash or close positions to cover the gap, at a moment of its choosing rather than the account holder's. The course's risk lesson names margin as one of two opt-in situations where the ordinary floor on what can be lost stops applying.
Learn this properly
Lesson 5: Risk, in the Language You Already UseWhat you can actually lose, why volatility and loss are not the same word, and diversification without the lecture.
Related terms
- Brokerage AccountThe account that holds your investments and places your orders on an exchange, opened with a licensed broker.
- VolatilityHow much a price moves around over a period, in either direction, measured as the size of the swings rather than the destination.
- LiquidityHow easily something can be turned into cash near its quoted price, without the act of transacting moving that price.
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