Margin Account Abuse
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A “margin account” is an account offered by brokerage firms that allows investors to borrow money to buy securities. An investor might put down 50% of the value of a purchase and borrow the rest from the brokerage firm. The brokerage firm charges the investor interest for the right to borrow money and uses the securities as collateral.
While margin investing can double the gains on an investment, it also doubles the risk. In fact, because interest immediately begins to be charged to the account and a temporary drop in the stock value can cause liquidation, the danger is even greater than many investors realize.
Using margin is a high risk method of investing and is only appropriate for sophisticated investors who fully understand the risk.