Use of Margin Accounts A customer who purchases securities may pay for the securities in full or may borrow part of the purchase price from his or her securities firm. If the customer chooses to borrow funds from a firm, the customer will open a margin account with the firm. The portion of the purchase price that the customer must deposit is called margin and is the customer's initial equity in the account. The loan from the firm is secured by the securities that are purchased by the customer. A customer may also enter into a short sale through a margin account, which involves the customer borrowing stock from a firm in order to sell it, hoping that the price will decline.
Customers generally use margin to leverage their investments and increase their purchasing power.
At the same time, customers who trade securities on margin incur the potential for higher losses. The terms on which firms can extend credit for securities transactions are governed by federal regulation and by the rules of the NASD and the securities exchanges. This investor guidance focuses on the requirements for marginable equity securities, which includes most stocks. Assuming the customer does not already have cash or other equity in the account to cover its share of the purchase price, the customer will receive a margin call from the firm. These changes in firm policy often take effect immediately and may result in the issuance of a maintenance margin call.