Advantages and disadvantages of margins

Advantages and Disadvantages of a Margin Account

Leverage
Using a margin account gives you leverage. Leverage means that you can purchase more marginable securities for less money.

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%.

Loans
Another benefit is the ability to take a margin loan and withdraw funds using the excess margin or buying power in your account.

In addition interest paid on margin loans is tax deductible.

The disadvantage of margin account Leverage

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.