What is Margin Account?

A margin account is a brokerage account which the broker lends the customer cash to buy securities. The loan in the account is usually collateralized by the securities purchased and cash and an interest will be charged when the margin facility is used. By using margin accounts, customers are using leverage in investing with the borrowed money which will magnify the returns from investment.

Benefits of Margin Account

Low interest rate

Most of the brokers provide interest rate ranging from 4% to 8% annually which is much lower than the interest rate (10% annually) incurred in collateral trading accounts. Therefore, it is a cheaper option for those who are looking for borrowing at a lower interest rate with high returns.

Purchasing dividend stocks can be a good way to offset the interest of a margin account. Thus, you can be benefited from the leveraged profits as well as the dividends distributed by the company.

Leverage gains & Lower Capital Investment

A margin account enables traders to leverage gains by having higher purchasing power to buy more shares than traders could if a cash-only basis trading account is used. Here’s an example to compare the return obtained from two trading accounts (With and Without margin facility):

When the share price increases by RM5 after 6 months, the profit gained from both accounts are as shown below:

Thus, a margin account allows traders to take advantage from trading opportunities by doubling the profits earned when the share price is in bullish trend. Moreover, lower capital is required to obtain the same amount of profits that you could earn from a conventional trading account.

Longer settlement Days

Unlike other conventional trading accounts which traders have to settle their outstanding shares within 3 trading days, a margin account does not restrict traders to settle their outstanding shares within a fixed period. Traders can hold the shares until the share price meet their expectation before they decided to exit from their position.

Diversifying portfolio

A margin account enables traders to diversify their portfolio, as traders are given higher purchasing power to purchase more shares. If you are short of cash temporarily while a trading opportunity arises, margin allows you to avoid selling your existing securities prematurely just to raise cash. Thus, a concentrated portfolio can be diversified by using margin trading.

What are the risks?

In our next blog post, we will be discussing on the risks of trading with a margin account and how we can mitigate the risks arisen from it. Please visit MQ Trader – Risk of Margin Account for more information.

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Disclaimer

This article does not represent a BUY or SELL recommendation on the stock covered. Traders and Investors are encouraged to do their own analysis on stocks instead of blindly following any Trading calls raised by various parties in the Internet. We may or may not hold position in the stock covered, or initiate new position in the stock within the next 7 days.

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