How to Open a Margin Account

A margin account allows you to borrow money from your broker in order to purchase investments. Not all brokers permit buying on margin, but most will allow for some degree of margin activity if you have a substantial amount of money invested with the firm. As a general rule, you can begin to ask your broker about the ability to borrow if you have placed $2,000 in your brokerage account. Once you have hit this figure, take the following steps.

#1 Talk to your Broker

If you would like to take the risk of investing on margin, you have to ensure your broker offers the service and is willing to provide it to you. The level of investment you have in the brokerage account will be the most important factor in determining how much you can borrow. Typically, you will initially be able to borrow no more than 50 percent of the amount needed to buy into an investment. Ask your broker what their investment limits are. Be sure to also discuss the requirements to keep a minimum amount in the margin account. If you drop below the specified amount, your broker will issue a margin call, which can result in the selling of assets at an inconvenient or expensive time.

#2 Specify Investment Goals

Any time you adjust your investment strategy with your broker, the broker is required to ask you basic questions about your investment goals and desires. This process is required by the Securities and Exchange Commission, and as a result your broker is required to make a note of these questions and follow these rules. If you have more than $100 million invested in the market, you may be exempt from making these elections at the time you open a margin account.

#3 Don't Over-Borrow

The SEC requires you borrow no more than 75 percent of the sum required to make a purchase at any given time. This basically allows you to borrow at a loan to value ratio of 75:25 to your brokerage account. However, this is a very high limit for most investors. Investors who are just beginning to invest on margin will want to take the process much slower. Be sure to only request margin purchases when it makes fiscal sense. For example, many investors buy options contracts on margin. They borrow the money needed to purchase the option and repay the account with profits made when the option is executed. 

#4 Protect your Interests

When you are buying on margin, it is more critical to closely monitor your investments. You may not have ultimate control over whether you are forced to sell an asset or execute an option as this can be dictated by the need to maintain your margin requirement in the account. As a result, monitoring your choices to assure you always have paths to protect your investment is critical. When you receive financial statements from your broker, read them. Know the maturity dates on all options you purchase, and put in place mechanisms to assure you minimize losses such as stop loss orders.

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