Which best describes a margin account?

Which best describes a margin account?

• A. An account that requires full payment for purchases
• B. An account that allows only cash transactions
• C. An account that requires partial payment and loans the unpaid portion
• D. An account that can only hold cash and not securities

Answer: (C)

A margin account is characterized by its ability to enable investors to borrow funds from their broker to purchase securities, which involves using leverage. This type of account requires the investor to make a partial payment, called the margin, for the securities they wish to buy, while the broker loans the unpaid portion. This arrangement allows investors to increase their purchasing power and potentially amplify their returns, but it also comes with increased risks since losses can be magnified as well.

The other options do not accurately represent the nature of a margin account. An account that requires full payment for purchases would describe a cash account, where investors must pay the full cost of the securities upfront. An account limited to cash transactions also pertains to a cash account, which does not permit borrowed funds. Lastly, an account that can only hold cash would not qualify as a margin account; margin accounts are specifically designed for trading securities, in which cash may also be a component, but it must include the possibility of buying on margin and leveraging positions.