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What is a Margin account?
A margin account is basically a loan account between you and a broker. When you use a margin account you first determine how many shares of a stock you want to buy, then you use your own money to put down the required margin of the total purchase price of those shares, and a Broker loans you the remaining amount.
To help you understand margin accounts, here are explanations of some special terms.
Current market value
This is the total value of the shares you have purchased as of the last trading date. The value is updated at the close of the market each day based on the closing bid. This process is known in the securities industry as "mark to the market."
The "Initial Margin Requirement"
The amount you must deposit when purchasing marginable securities. The minimum "Initial Margin Requirement" is set by the IDA and the exchanges, however a higher minimum requirement may be set by the Broker. The regulators can and do change the initial margin requirement as market conditions demand.
The "Debit Balance"
The amount loaned to you by a Broker is called your "debit balance." Your debit balance consists of the amount you owe the Broker plus interest on this loan amount.
This is the difference between the current market value of your stock and your debit balance. Your equity changes as the current market value of your stock rises and falls and as interest is added to your debit balance.
An example of trading on margin.
Let's say you buy 100 shares of Walt Disney selling at $80 a share on margin.
The current market value of your purchase would be $8,000. Using the 30% initial margin requirement, you would deposit $2400 into your margin account. Then the Broker would loan you the remaining $5600 which would be your debit balance. Your equity in the account would be $2400 (or 30%).