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A margin agreement is a securities customer agreement signed by an investor who wants to borrow money against securities he or she already owns and purchase new securities with the loan. A margin agreement is almost always preceded by a cash account at the same broker. A margin agreement specified that the customer grants a lien on the account to the broker under certain regulated conditions. This part of the margin agreement is called the “hypothecation” agreement. Where the limits on the margin agreement investor’s borrowing exceed certain levels, the broker automatically sells stock. This stock sale under a margin agreement when the customer does not cover the margin amount with cash is a “margin call” sale. For example, if you borrowed $7,000 to buy IBM on margin and your margin agreement was based on 100 shares of GOOG trading at $150, a margin agreement would force a margin call if GOOG stock went down to $80. Under your margin agreement your GOOG stock worth $8,000 x 50% would be worth only $4,000. A margin agreement would require you to sell at least $3,000 worth of IBM. A margin agreement loan is limited by the Federal Reserve regulations to no less than 50% of amounts already invested. Low interest rates for borrowing with margin agreement loan money are designed to encourage investors to buy securities on margin. |
