Margin Account Definition: Day Trading Terminology
Margin Account is a type of brokerage account that allows you to buy stock on margin by borrowing money through your broker. Generally there is an application process that has to be approved by the broker to ensure you are eligible for a margin account. For margin accounts, there is an account minimum of $2,000 but you will be given 2 to 1 leverage, which means if you have $2,000 in the account you will have up to $4,000 in buying power.
When purchasing on margin, some stocks and ETFs may have higher margin requirements than others depending on the security you are looking at. Most have a 50% requirement which means you have to put half of the cost of the trade before you are allowed to use margin. So if you are looking buy 1,000 shares of a stock at $10 for a total trade price of $10,000, you would have to put up $5,000 of your own money to complete the transaction. Some securities, like triple leveraged ETFs, could require up to a 90% requirement, so if we were buying $10,000 dollars worth of it we would have to put up $9,000 of your own money in your margin account.
With a margin account you will be subject to the patter day trading rule, which requires you to have a minimum of $25,000 in equity in your margin account if you place more than 3 day trades in a 5 day period. If your account is labeled as a pattern day trader then you will have to maintain that account minimum and if you don’t, you will not be able to day trade. However, if you do have the minimum equity requirement then you will be given day trading buying power which is 4x more than normal amount. So if you had $25,000 in your account then you would have $100,000 worth of day trading buying power. Keep in mind that you cannot use day trading buying power to hold positions overnight.
Margin Account — Pros & Cons
A great benefit with opening a margin account as opposed to a cash account, is that you are able to increase your buying power, which will give you the opportunity to trade larger size and make more money. However, there are some major setbacks to using margin. For instance, you can lose more money than you have in your account and would be in debt to your broker in the amount of the debit balance. Also, if you hold positions over night on margin you will be charged interest on the amount borrowed, which would nibble away at your profits.
Trading in a margin account is not for everyone and should be taken very seriously because it can ruin your account if you don’t take the proper safety precautions.
Warrior Trading Pro Tip
If you’re looking to open a margin account, make sure you fully understand what you are getting yourself into. Trading on margin is very risky and can deplete your account quickly if not managed correctly. Risk management is an important part of trading but even more so when using margin. Make sure to always protect your positions with stop orders!