Trading with the margin accounts is like the proverb “two edged sword”, which may cutout the both ways. The Margin account allows you to borrow the money for the buying of stock. It is great deal for the common man, if the stocks go up, but it could be disasters if the stocks head down.
Margin trading uses power of the borrowed money to find out your capacity of buying the stocks through your account. The brokers provide you the money since they need you to buy stocks or do trade with them.
How to signup the margin account
If you want to use margin account you must have to signup for the margin account. It is quite different from the regular accounts. Most of the brokers will ask you about the level and the amount of investment that you can do through them before opening the account.
Margin accounts must require the initial deposit which could be up to 5,000$ dollars depends on the broker. The opening deposit can be called minimum margin too. It is to calculate your buying power. For e.g. if you deposit 2,000$ dollars it means you would have the 4,000$ dollars buying power (2,000$ dollars which you deposited and 2,000$ dollars which you can get from the middleman.
You have the margin nearly till 50 % of the stock’s price in several cases. For e.g., if you want to buy about 100 shares of the stock and selling for 20$ dollars each for the total amount of 2,000$ dollars. In this case you could have the margin of 1,000 dollars of the purchasing price. In short you would 1,000$ dollars of your initial deposit and the other 1,000$ dollars broker will lend you.
You don’t have to lend about 50 %. Some of the stocks would have lower extremes and some middlemen wouldn’t allow you to have margin of around 50%. You can now buy 2000 shares which worth 2,000$ dollars, but your investment would be only 1,000$ dollars. If the stocks go up till 25$ dollars per share, now it will worth 2,500$ dollars. A good return is in the deal of 1,000$ dollars.
Although, if the stocks go down till 5$ dollars each share, your current holding worth 500$ dollars and you can still owe the 1,000$ dollars from your broker + interest. The broker must contact you soon and get ready for his call. The broker will make the call as to equilibrate the minimum balance of your account which is the part of the agreement which you have already made with the broker. You have to equilibrate your balance up to a definite level.
If your account balance decreases up to 30 to 40 percent, the broker must make you a margin call which means that you have to equilibrate your account balance. You can easily do this by depositing some more money in your margin account or eselling your stocks. In tremendous situation and problems the broker can sell your shares without your consultation.