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Lesson 9. Opening a Brokerage Account > Margin Account - Pg. 49

Opening a Brokerage Account $993 + $993 = $1,986 49 Next, let's say that the value of XYZ stock doubles the next day, and your stock is now worth $3,972 ($1,986 + $1,986). You can sell the stock (the sell order will cost you $7 again), give $993 back to the brokerage house, and pocket $2,972. Compare your $2,972 with the $1,979 the investor with a cash account would have made with the same investment ($993 + $993 = $1,986, which is the initial amount invested and the capital gain when the stock value doubled, minus $7 for the sale is $1,1979), and you're ahead of the other investor by $993. So why isn't everyone using a margin account? On the other side, let's say you still make the initial purchase of $1,986, and the next day the value of XYZ stock drops by half. Your stock is now worth $993 and that's also the amount the brokerage lent you, so you have to repay that amount plus the $7 for the sale order. You are effectively back at zero. The guy in the cash account, though, is still holding stock worth $496.50 ($993 ÷ 2). Not a great day by any standards, but still preferable to owning nothing and being $7 in debt for service charges to boot. One More Point Obviously, most real-life examples aren't quite as dramatic or straightforward. Did I mention that the brokerages will also charge you interest on the loan? So even in less dramatic examples, the margin account investor will need to make a higher profit to come out ahead, since the interest charges must be figured into the formula as well. Finally, certain restrictions apply as to what kinds of stocks can be purchased or sold through margin accounts. These restrictions are usually reserved for the more obscure stocks and therefore don't necessarily prohibit regular day-to-day transactions. Margin accounts certainly appeal to the risk takers. In addition, they can prove a useful tool for