Margin Accounts: What Are Margin Accounts & How Do They Work? – Options Trading with David Jaffee
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What are margin accounts

What are Margin Accounts?

When learning how to make money in the stock market, you might have heard the term margin accounts or a margin call. With that said, what is a margin account? And how is it relevant to your options trading journey? 

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How does a margin account work?

Margin accounts are brokerage accounts in which the broker lends you money to buy stocks or trade. The initial amount borrowed is limited to 50% of the purchase price of a stock.

Based on this loan, you have to pay interest. The stocks that you buy are then used as collateral in case the stocks depreciate below a certain value.

For many investors, margin accounts provide an advantage as it increases your buying power. In the case where you might not have enough capital to make a trade, you can borrow money when using a margin account!

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Are margin accounts a good idea?

Margin funds usually provide an advantage over investing with just cash. For those that don’t know the difference between a margin account vs cash account, a margin account allows you to have more buying power compared to just using a cash account.


This is because you can invest more than what you have without a bank loan.

Additionally, if the stocks you bought increase in value above the interest rates charged for the margin funds, you'll make a profit!

Risks involved with margin accounts

But what about the potential risks with this strategy?

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There are significant risks involved with trading on margin.

Margin is a double-edged sword.

You can make more money, but you can also lose more money.

Especially when trading options, since the buying power reduction for stocks is about 50% of the market value of the equities, and when trading options the buying power reduction is ~10% - ~20%. 

During recessions, or black swan events, it’s possible for option sellers to be forced into a margin call and sustain large losses if they trade too large.

How long can you use margin money?

When trading stock, you can keep your loan for as long as you need, provided that you meet the brokerage firm's margin requirements. Keep in mind that you also have to pay the interest on your loan.

Option sellers DO NOT pay margin interest, but equity traders do.

When trading equity, the interest charges you owe the brokerage firm increase the longer you borrow funds from the brokerage firm.

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What is a margin call?

As a trader, you’ll receive a margin call when the value of the securities you bought drop below a certain amount, the brokerage firm you borrowed from can either ask you to sell your stocks or it will request that you add more money into your margin account to cover the brokerage’s risk.For those who are new to margin accounts, this may seem like a bad deal for you to agree to, as the brokerage firms have way more control over the money in the account than you do!

In the United States, the Federal Reserve Board has set a maintenance margin for margin accounts. This means that investors like you need to make sure the overall amount of money (not including what you initially borrowed) in the account stays above a certain number!

When it comes to different firms, this can get even more complicated as their margin accounts can demand a higher maintenance margin (at the brokerage firms’ discretion).

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In the United States, most option traders use Regulation T or Portfolio Margin.

Brokerages usually offer Portfolio Margin to accounts over ~$150,000.

Portfolio margin looks at the risk of your entire portfolio, in aggregate.

In general, Portfolio Margin can offer about 3x - 5x as much buying power to options traders when compared to Regulation T.

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When dealing with margin accounts, it can be a great way for options traders to increase their buying power by up to 3x -5x times, when compared with buying stocks. 

However, this strategy also introduces a lot of risk.

Overall, trading options on margin, when implemented correctly, can generate a large profit.

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Frequently Asked Questions (FAQs)

What is a margin account?

A margin account is a  type of brokerage account which allows investors to purchase securities with borrowed funds, requiring a deposit of cash or assets as collateral to cover the risk on such transactions.

Is trading a margin account a good idea?

Yes, it is, as long as you're disciplined and don't take too much risk. If you trade too large and invest in risky companies, then trading on margin is not a good idea. You will always make money in the stock market as long as you don't lose money, as a result, it's very important to minimize risk and mitigate drawdowns.

What is a cash account?

A cash account is a type of brokerage account in which the investor must pay the full amount for securities purchased.

If margin is risky, how can I avoid losing money?

The best way to mitigate portfolio volatility is to buy options and ensure that you don't trade naked options (unless you want to own the stocks that you've sold options on).

About the Author David Jaffee

I (David Jaffee) help people become consistently profitable traders while minimizing risk. I graduated from an Ivy League University and worked at some of Wall Street's most successful investment banks. Subscribe to my YouTube channel for valuable videos - BestStockStrategy YouTube Channel​. Finally, if you're looking to Land a Finance Job, then I've put together the best step-by-step course at My personal website is

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