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Advantages and Disadvantages of a Margin Account
Let's say, continuing with the previous example, that Disney goes up $20 per share giving you a total unrealized gain on the stock of $2,000. If you had originally paid in full for the stock with $8,000 of your own money, your percentage gain given this $20 per share increase would be 25% ($2,000 divided by $8,000). However, because you used margin and put up only 30 percent of the total purchase price, your percentage gain is ($2,000 divided by $2400) or 83%.
In addition interest paid on margin loans is tax deductible.
Unfortunately, leverage also works in reverse. If instead of rising $20 per share, Disney fell by $20 share, all of the calculations we just talked about would be turned around. Your percentage loss in the margin account would be 83% compared to only 25% in a cash account. In addition, there are circumstances where your account could be liquidated.