At Lightspeed, we strive to do more than just offer trading tools and platforms with some of the lowest trading fees in the industry. We also consistently provide informative content that helps traders of all levels to more easily grasp the intricacies of the market. Our latest webinar, “Understanding Margin Rules and Requirements,” explores the conditions that dictate the management of margin accounts with Lightspeed.
Rob Livson, VP of Business Development for Lightspeed, commenced the webinar by going over the basics of margin accounts. Essentially, such an account allows you to borrow money to trade securities in the secondary options, futures, and the equity market. With these accounts, traders and investors can buy, sell, and short sell securities at a capacity they might not have been able to otherwise.
Normally, maintaining these accounts requires at least $2,000 in equity through marginable securities or cash deposits. However, the Financial Industry Regulatory Authority (FINRA) has established rules that establish certain traders as Pattern Day Traders (PDT). This classification applies to traders that perform four or more day trades within a 5-trading day rolling period. To maintain a PDT account, traders must maintain $25,000 in equity.
To manage a successful margin account, you must understand the concept of buying power (BP). Such accounts can leverage up to four times the amount of equity they have invested in the account. As per the example, Livson describes in the webinar, an account with $25,000 in equity would, therefore, have $100,000 in buying power. Note that buying power is reduced to twice the amount of invested equity for overnight trading.
Brokers like Lightspeed manage the inherent risk of the market by increasing or decreasing the amount that can be borrowed for trading certain types of securities. For example, if a particular security requires 50% of its buying power in value, then a trader’s equity would be reduced by 50% of the total amount of the investment. In the webinar, Mr. Livson details the BP requirements of several different types of securities, as well as some exceptions not listed here.
To sustain a margin account, traders must ensure that they maintain their required BP levels for all intraday and overnight trading. Accounts can incur several different types of calls depending on the requirements they fail to meet and whether or not they belong to Pattern Day Traders. When brokers issue a call, the account holder must meet it by either deposit cash in the entire amount of the call. Alternatively, in accordance with the type of call, traders may deposit or liquidate eligible securities that may exceed the amount of the call.
Lightspeed, like other brokers, charges interest based on the borrowed amount over the lifetime of a particular equity. This annualized interest rate is charged per day and can change over time.
Our webinar can be viewed in full here.
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