Margin Accounts
A margin account give you the ability to borrow money against the securities in the account to buy more stock. Because you have the ability to borrow in margin account, you have to be qualified an approved by the broker. After you are approved, this newfound credit gives you more leverage so that you can buy more stock or do short selling.
For penny stock trading, the margin limit is 50 percent. For example, If you plan to buy $10000 worth stock on margin, you need at leaset $5000 in cash sitting in your account. The interest rate that you pay varies depending on the broker, but most broker generallly charge a rate that several points higher than their own borrowing rate.
Why use margin? Margin is to stock what mortgage is to buying real estate. You can buy real estate with all cash, but many times, using borrowed funds makes sense since you may not have enough money to make a 100% cash purchase or you prefer not to pay all cash. With margin, you could for example be able to buy $10000 worth stock with as little as $5000. The balance of the stock purchase is acquired using a loan (margin) from the brokerage firm.
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