What is a margin account?

A margin account is an account offered by brokerages that allows investors to borrow money to buy securities. In a simplified example, an investor might put down 50% of the value of a purchase and borrow the rest from the broker. The broker charges the investor interest for the right to borrow money and uses the securities as collateral.

The specific calculations as to how margin works get a little more complicated, but you can learn about this in our Margin Trading Tutorial.

The important thing to understand about margin is that it has consequences. Margin is leverage, which means that both your gains and losses are amplified. Margin is great when your investments are going up in value, but the double-edged sword of leverage really hurts when your portfolio heads south. Because margin exposes you to extra risks, it's not advisable for beginners to use it. Margin can be a useful tool for experienced investors, but until you get to that point, play it safe.

Important: Buying securities on margin is not appropriate for all investors. Before investing on margin, please read the Margin Account Agreement for important risk disclosure information, and see ShareBuilder's margin interest rates.