Articles Posted in Frequently Used Investment Terms

Read Your Margin Agreement:

As with any type of business transaction that you are contemplating, it is important for you to read and understand fully all of the terms and conditions of any type of margin or, for that matter, loan agreement which you are considering.  The explanation of the account executive of the terms, risks and rewards of what is contained in the margin agreement is superseded by the document itself.  Moreover, the agreement will refer the reader to other rules and regulations that are incorporate, by reference, into the document.  These rules and regulations are of equal force with the terms of the margin agreement.

It is for these reasons that a customer is required to sign the margin agreement to open a margin account.  The agreement may be part of your account opening agreement or may be a separate agreement. The margin agreement states that you must abide by the rules of the Federal Reserve Board, the New York Stock Exchange, the National Association of Securities Dealers, Inc., and the firm where you have set up your margin account.

Understanding Margin –

Margin is borrowing money from your broker to buy a security and using your investment as collateral. Investors generally use margin to increase their purchasing power so that they can own more securities without fully paying for it.  The amount owed to the broker is called the debit balance.  Through the use of leverage, investors attempt to magnify gains on actual cash or collateral deposited into their accounts.  But at the same time, the use oft margin exposes investors to the potential for higher losses.  Another reason for borrowing money from brokers is the feature involving a no-repayment-date loan.  This feature is generally not available through other types of lending institutions, including banks.  The no-repayment feature, although very attractive, can be fraught with danger.  The investor should be made aware that if the value of securities on deposit with the broker declines substantially, the broker will require additional funds or collateral to protect the loan.

There are 2 primary types of margin requirements: initial and maintenance.

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