Securities (stock) transactions through a brokerage are made under either a cash or margin account.
A straight cash account allows you to purchase investments up to the amount deposited within your account. The set up is perfect for those who intend to pay cash in full for all purchases made under the account. Account settlement is usually three business days after your trade.
A margin account is designed to allow you to borrow money against the securities (stocks, bonds, etc.) you currently own or intend to purchase (or sell short). Thus, investors who purchase on margin initially pay only a portion of the full transaction price. Margin requirements, or the amount you must deposit on equities and mutual funds, are generally 50% of the market value of the securities. In other words, you can purchase $20,000 worth of marginable securities with only $10,000 of your own cash. Essentially, your brokerage firm lends you the remainder or $10,000, charging you interest on the loan.
The term margin refers to the amount of funds you are required to personally provide. This amount plus the amount loaned to you by your brokerage together make up the total amount required to complete the transaction. Interest on your margin loan is calculated daily based on that month's debit balance. Please note that you must apply to open a margin account through a Margin Account Agreement Form.
Below is a table detailing the maximum loan values your broker may extend you for long positions in stocks listed on any recognized exchange in Canada or the US.
|Maximum Loan Values|
|On Listed Securities Selling||Maximum Loan to You|
|Option Eligible Securities||70% of market value|
|at $2.00 and over||50% of market value|
|at $1.75 to $1.99||40% of market value|
|at $1.50 to $1.74||20% of market value|
|under $1.50||No loan value|