To buy stock on margin means you used a loan -- a margin loan -- from your broker to pay for part of the cost of the stock. A non-margin stock means you paid for the full price of the stock with cash in your brokerage account. An understanding of margin loans will allow you to use this brokerage account benefit if it helps with your investment goals.
Types of Brokerage Accounts
Stock brokerage firms offer two types of accounts: cash and margin accounts. To buy stocks using margin you must have a margin account. In a cash account you must pay the full price for any stock shares you purchase. So stocks owned in a cash account will -- by the way the account functions -- be non-margin stocks. In a margin account, stock investments may be margin purchases or non-margin stocks.
Buying on Margin
With a margin account, you can borrow up to 50 percent of the cost of stock investments using a margin loan from the broker. So with $10,000 in an account, you could buy up to $20,000 worth of stock. A margin loan starts when you exceed your cash balance in the account. For example, starting with $10,000 cash if you bought $8,000 of stock, the investment would be a cash purchase. Then when you buy $6,000 more, the remaining $2,000 in cash plus a $4,000 margin loan would cover the cost of the investment. After the second purchase you would have $14,000 in stock and a $4,000 margin loan. Sell the stock and the loan would be repaid.
Cash Account Considerations
With a cash account, you can only buy stock up to your cash balance or with cash you can deposit within three days of making a stock purchase. Due to Securities and Exchange Commission rules, you cannot rapidly buy and sell stocks, as in day trading where you own a stock for less than one day, for example. A cash account is less risky than having a margin loan if the stock market goes down. An IRA brokerage account is a cash account.
Your broker tracks whether stocks have a margin loan or are non-margin due to the potential to lend shares out of a margin account. When traders sell stock short, the broker lends the shares sold short. Those shares can come from broker customers that have margin loans on their accounts. So non-margin stock in any type of account cannot be lent out by the broker.
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