What does a margin account allow investors to do?

A margin account allows investors to buy more shares than they can afford using only their own capital. This type of account enables investors to borrow funds from their brokerage firm to purchase additional securities, thereby amplifying their purchasing power. By doing so, they can potentially increase their returns when the value of the investments rises. However, it is important to note that while margin accounts can enhance the potential for profits, they also increase the risk, as losses can be magnified if the value of the investments declines.

While cash transactions and short selling could happen in other types of accounts or contexts, a margin account specifically focuses on leveraging borrowed capital, making it distinct from simply trading in cash transactions or imposing restrictions on short selling or the type of securities that can be invested in.