Newbie - Market Account And Margin Account?
Q: This brokerage house has this quote: Only $500 Minimum Equity Required to Open A Market Account ($2000 for margin account). What's a Market Account, and what's a Margin Account?
A:
Let's start with the more complicated and dangerous version. A
"margin" account is a "line of credit", i.e. a way for you to
*borrow* money to buy more stocks than you could buy if you were
to pay cash for the stocks. With some things not eligible for
such borrowing ("not marginable"), you are currently allowed to
BORROW as much more mo
of your own money. Whatever happens to the price of the stock,
you never OWE any less than the amount that you borrowed to
buy it. In fact, it will always be more because you then become
required to pay interest on the money that you borrowed to buy
the stock. If, and only if, the stock rises in price, you can wind
up "making more money" because of having more shares in your
account than you could have bought without the loan. However, if
the stock goes DOWN in price, you not only still owe the same
amount plus interest but can be subjected to a "margin call", a
demand from the broker that you put up more money to keep the
number of shares that you bought with borrowed money. If the
stock goes down fast enough, you can even owe more money than you
ever put into the account in the first place. That is what a
"margin account" is, a way to borrow money so that the danger to
your finances is increased.
The other term, "market account" is a cutesy terminology of
the specific broker that you're talking to. It implies a number
of things about the way that broker does business, including
suggesting that the broker wants to have you enter all orders
"at the market" so that the broker or its cronies can rip off
some extra from you every time you do a transaction, instead of
allowing you to specify your own price, a "limit order", when
buying or selling shares. The more normal terms for such accounts
are "cash account" (what it says, you pay cash or receive cash
when buying or selling shares) or a "transfer and ship" account
from which you actually get ownership of shares every time you
buy anything, instead of it all being solely a gambling fund in
the possession of the broker from which you never get anything
(beyond an "account statement") but are only subjected to the
danger of losing value.
Be careful, Janet. These are dangerous times, much moreso
than practically any other time in the more than 41 years that I
have been trading stocks. Do yourself the favor of clicking
through some of the links on my absolutely free web site to
learn more about stocks and investing before you ever send money
to anybody.