What does a margin account allow you to do?

A margin account primarily allows investors to borrow money from their brokerage to purchase securities. This leverage can amplify potential returns on investments because investors can buy more securities than they could with just their own capital. The brokerage holds the securities in the margin account as collateral against the loan provided to the investor.

This borrowing capability differentiates margin accounts from cash accounts, where investors can only use their own funds to purchase securities. It’s important to understand that while margin accounts can increase profits, they also increase risk, as losses can also be magnified when using borrowed funds.

The other options do not accurately reflect the main function of a margin account. For example, while margin accounts may offer advantages in trading strategies and short-selling, these elements are not their primary focus. The ability to trade without commissions is often associated with certain brokerage promotions but does not define how a margin account operates. Investing in mutual funds does not typically involve a margin account, as mutual funds are usually purchased through cash accounts.