What does a long margin account allow a client to do?

What does a long margin account allow a client to do?

• A. Completely finance a securities portfolio without borrowing
• B. Partially finance a securities portfolio by borrowing money
• C. Sell securities without owning them first
• D. Invest in high-risk securities without restrictions

Answer: (B)

A long margin account enables a client to partially finance a securities portfolio by borrowing money. This means that the client can use their own funds along with borrowed funds from the brokerage to buy more securities than they could if relying solely on their cash. This borrowing allows for greater leverage, which can amplify both potential gains and risks associated with investing.

The concept is rooted in the practice of margin trading, where the securities purchased serve as collateral for the loan. This allows investors to effectively increase their purchasing power in the market while being mindful that they are responsible for the borrowed amount, as well as any interest on it.

In contrast, financing a portfolio completely without borrowing would not harness the benefits of leveraging that a long margin account offers. Selling securities without owning them first relates more to short selling, which is not an activity conducted through a long margin account. Additionally, investing in high-risk securities without restrictions does not accurately reflect the nature of a long margin account, as lenders typically impose certain conditions and limits on the types of securities that can be purchased using borrowed funds.