Which statement about a margin account is true?

Which statement about a margin account is true?

• A. It allows you to borrow money using securities and cash as collateral
• B. It is only used to hold cash investments
• C. It guarantees a fixed rate of return
• D. It eliminates all investment risk

Answer: (A)

Margin accounts let you borrow funds from a broker by using the securities you own (and any cash in the account) as collateral. This boosts your buying power, so you can purchase more securities than you could with cash alone. The amount you can borrow is set by margin requirements, and you’ll pay interest on the borrowed money. You also must keep a minimum level of equity in the account; if the value of your holdings falls and your equity drops below that maintenance level, you may receive a margin call and need to deposit more funds or sell assets to restore the balance. Because you’re using leverage, both potential gains and potential losses can be amplified, and there’s no guarantee of a fixed return. It’s not limited to holding cash investments, and it does not eliminate investment risk—the leverage introduces additional risk.

Margin accounts let you borrow funds from a broker by using the securities you own (and any cash in the account) as collateral. This boosts your buying power, so you can purchase more securities than you could with cash alone. The amount you can borrow is set by margin requirements, and you’ll pay interest on the borrowed money. You also must keep a minimum level of equity in the account; if the value of your holdings falls and your equity drops below that maintenance level, you may receive a margin call and need to deposit more funds or sell assets to restore the balance. Because you’re using leverage, both potential gains and potential losses can be amplified, and there’s no guarantee of a fixed return. It’s not limited to holding cash investments, and it does not eliminate investment risk—the leverage introduces additional risk.