Margin Calls: The Dangers of High Risk
If you’ve been investing for any length of time, you’ve probably at least heard of something called a “margin account” or a “margin call.” If you’ve never had this kind of account, don’t open one until you should do some careful research and understand exactly what it is. Even if your broker recommends it, if you don’t understand everything that’s involved, just say no. You can find out one day that your money is completely gone, sometimes in the blink of an eye.
A margin account is used to buy more securities than you would normally be able to, borrowing money from a brokerage in order to do so. It’s highly profitable for both brokerages and brokers, but may not be for you. It is, by many accounts, a “double-edged sword,” and not advised for anyone who isn’t a very skilled trader.
A broker or brokerage may open a margin account for you, in which you’ll deposit a sum of money as collateral. You may open one voluntarily, or it may be part of an agreement when you open an account. In either case, your broker is required to obtain your signature. You’ll also sign a margin agreement, which you must read carefully. Ask your broker questions about anything you don’t thoroughly understand before you sign it.