What is a margin account?? Learn about margin trading, a financial tool that helps investors buy securities with borrowed capital from a securities company.
1. What is a short-term margin account?
Deposit is provided in Article 330. Civil Code 2015 is the act of the obligated party depositing a sum of money or precious metals, precious stones or valuable papers into a blocked account at a credit institution. This ensures the full performance of the obligation.
In case the obligated party breaches or fails to comply with the agreement, the credit institution will use the collateral to pay compensation for damages, after deducting related service costs.
In accounting, account 144 is used to reflect assets or capital that an enterprise uses as collateral, deposit or bet for a term of less than one year or one production and business cycle. These amounts are often made at banks, financial companies or other credit institutions to ensure the performance of financial obligations or contracts.
2. What is a securities margin account?
What is a margin account? According to Clause 10, Article 2 of Circular 120/2020/TT-BTC, margin trading at a securities company is understood as the activity of purchasing securities using money borrowed from a securities company. In this transaction, the securities purchased by the investor, along with other securities in the margin account, will be used as collateral for the loan.
Through the above provisions, margin in securities is considered as margin trading at the securities company. Securities obtained from margin and other securities are margin traded by investors.
This is a leveraged financial tool that allows investors to expand their ability to buy securities beyond their own capital. For example, if you have 50 million VND and an initial margin of 50%, you can participate in transactions of up to 100 million VND, of which 50 million is borrowed capital. The purchased shares will be used as collateral, and you will need to pay interest on the loan of 50 million VND.
Margin account according to Circular 133
Circular 133 has rearranged the accounting system, including merging accounts related to deposits, pledges, mortgages, and short-term or long-term mortgages into account 1386 – Pledges, mortgages, deposits, and pledges. This change aims to simplify the accounting process and management of financial accounts.
Margin account
A security deposit is another form of security, often used in the case of a lease of real estate. According to Article 329 of the 2015 Civil Code, the lessee will deliver a sum of money or valuable property to the lessor to ensure the return of the leased property at the end of the contract.
- If the property is returned on time, the lessee will receive back the deposit or security deposit after paying the rental charges.
- In the event that the property is not returned or is lost, the collateral will belong to the lessor as security.
Margin accounts and regular accounts
Margin accounts and regular accounts are two commonly used types of accounts but have completely different purposes and characteristics. Margin accounts are used to secure financial obligations or special transactions, often requiring the blocking of valuable assets. Meanwhile, regular accounts serve daily financial activities such as payments or salary receipts and are not bound by the conditions of blocking assets.
In practice, margin accounts are often and safe investment fund are used in transactions such as stock investments, bank guarantees or transactions with high risk levels. In contrast, regular accounts are more suitable for basic activities such as paying bills, daily expenses, or managing personal finances.
However, margin accounts are riskier than regular accounts, especially when used in leveraged financial transactions such as margin trading. Although it can bring greater profits, it also carries a high risk of loss if the investor does not manage loans and financial obligations well.
In general, each type of account has its own role and meets different financial needs. Understanding the characteristics of both types of accounts will help you choose and use them more effectively, in accordance with personal or business goals.
3. Outstanding features of margin trading
Margin trading requires investors to put up a portion of their assets as a loan. This loan is limited to the initial value of the assets the investor provides, which is equivalent to the Initial Margin (IM). This is the minimum amount the investor must have on the total value of the expected securities transaction.
The total value of assets in the margin account, including cash and stocks, is used as collateral. These assets must be kept at a credit institution and are subject to freezing according to regulations.
The interest rate applied to margin loans depends on the policies of each securities company. Therefore, investors need to carefully consider the fees incurred and the interest rate to ensure profits. If the value of assets in the margin account falls below the required ratio, the securities company will require the investor to deposit more money. If not met, the company can sell some or all of the securities in the account to reduce risks.
Only stocks listed or licensed for trading by the Stock Exchange are eligible for margin trading. The criteria used for approval include:
- Minimum listing and trading time.
- Capital size and business performance of the issuing enterprise.
- High liquidity, stable price fluctuations.
- Transparency in disclosing information sources.
Investors can look up the list of securities eligible for margin trading published on the website of the Stock Exchange.
4. Types of margin trading
Margin transactions can be divided into three basic types: surety bonds, L/C (Letter of Credit) bonds, and business operations bonds.
- Guarantee deposit: Applicable to investment projects requiring guarantees, such as real estate projects or land use conversion purposes.
- L/C deposit: Is a form of letter of credit, issued by an intermediary bank to ensure payment for transactions between the exporter and importer.
- Business Operation Deposit: Applicable to some industries that require business conditions such as international travel or employment services.
In securities trading alone, margin is divided into:
- Buy on margin (Long position): Investors borrow money from securities companies to buy stocks, then repay the principal, interest and other costs incurred.
- Short position: Investors borrow stocks to sell first, then buy back the stocks to pay the securities company.
The escrow procedure requires that the collateral be deposited in a blocked account at a bank. In the event that the investor fails to fulfill his obligations, the bank will use the escrow assets to pay or compensate for damages.
5. The role of margin trading
Margin trading provides investors with the opportunity to increase their profit margins without having to invest additional capital. With the borrowed funds from margin, investors can expand their investment portfolio, capture potential market opportunities or increase the volume of quality stocks in their portfolio.
The process of registering for margin trading is also very simple, just complete the contract with the securities company and the investor can use the loan ratio that has been granted to place trading orders.
6. Some related terms used in margin
- Margin account: An account opened to conduct securities transactions, where both cash and stocks of the investor are kept.
- Margin Level: Maximum percentage that an investor is allowed to borrow on the total transaction value.
- Deposit: Is the capital temporarily blocked to secure transactions or financial obligations.
7. Deposit payment
When the depositor fails to perform its obligations, the bank will use the deposit to compensate the damaged party. However, this amount will be deducted from the service fees incurred before payment.
8. Who is margin trading suitable for?
Margin trading is a financial tool suitable for experienced investors who know how to use leverage to optimize profits. However, if not well controlled, margin can cause great risks due to the volatility of the market.
Investors need to have a clear plan, analyze the market carefully and limit the use of full margin with stocks that have unclear growth potential.
9. Conclusion
Margin trading is a powerful but challenging tool. Using it effectively requires a deep understanding of the market, a clear strategy and good risk management. Hopefully, the sharing from HVA Group will help investors have a more comprehensive perspective to answer the question. What is a margin account?? and build effective investment plans in investment.
