A margin account is a brokerage account that allows investors to purchase specified amounts of stock from a securities firm. While purchasing stock from a securities firm, a customer advances only a portion of the purchase price. The remaining amount is taken as either credit or a loan from a brokerage firm. The brokerage firm extending such credit will maintain the stock purchased as collateral for the loan and charges interest on the balance of the purchase price. Usually brokerages charge a low interest on margin loans for the purpose of enticing investors into buying stock using a margin account. Such interest will be charged only for the period of time that the loan is outstanding. If the value of the stock drops a certain amount, the account holder will be required to deposit more cash or sell a portion of the stock.
Buying securities on credit using a margin account is subject to standards established by the Federal Reserve. However the margin requirements and interest may vary among broker/dealers. According to the Federal Reserve limits, an investor using a margin account can put down 50% of the value of a purchase and borrow the rest from the broker. Margin accounts are used not because people don't have the money to make the full purchase, but it is to take advantage of the opportunity to leverage their investment. A margin account is also called a general account.