What is an Account Balance
An account balance in the most basic sense is the amount of money held in financial repository at any point in time. It can also refer to the amount of money that is owed to a third party. These third parties could include:
- Mortgage bankers
- Utility companies
- Credit card companies
All types of lenders and creditors fall into this category. To get the actual account balance, the debits and credits are factored in to get the net amount. The account balance also includes the money that is available in your forex trading account after all debits, credits, and charges have been factored together.
In the banking sector, an account balance refers to the amount of money that an individual has in either their checking or savings account. This amount is also arrived at after balancing all the debits and credits coupled with any charges.
What is a Margin Balance
Margin balances, on the other hand, accrue to margin accounts. These accounts are used by investors to borrow with the purpose of buying new positions or selling short. Investors use margin to leverage on positions and also to profit from bullish and bearish periods in the market.
They can also use them to make cash withdrawals basing the value of the account as the short term loan. They are usually opened under strict terms and conditions. Usually, your broker has to get your signature of approval.
Margin accounts have been regarded as cost effective by many investors. This is due to the margin balance. This, at times, is referred to as creating debt. When the margin balance is created, there is an accrued and outstanding balance.
The balance accumulates a daily interest which is charged by the respective firm. The charged rates are subjected to the current prime rate coupled with an additional charge administered by the lending firm.
It is a requirement that margin accounts maintain a specified margin ratio at any given time. Once the value of the account plummets below this limit, a margin call is issued. This is typically a demand for deposit to return the account back to the specified limits. An investor may use cash or securities if they prefer. Some of the holdings may be sold to raise this cash, or the investor could just pump in new cash.
Why Do Traders Want Margin Interest
The reason why margin interest rates are attractive to investors revolves around their affordability. They are quite lower than the interest rates charged on loans from financial institutions like banks. Hence, they form an incentive to investors. They are chosen in the event that an investor requires a short term loan to purchase an investments. This short term loan is usually cost-effective and scores high in the cost benefit analysis hence the reason why they are preferred.
The margin balance is, therefore, the negative number that is representative of the amount that is borrowed or the debt balance. Trading accounts have to be approved for margin hence a margin balance can only be displayed after this approval.