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Open a Leverage Account

Are you considering expanding your investment strategy by opening a leverage account with Fidelity? Using leverage can help magnify your buying power in the stock market but comes with increased risk. It's important to navigate this process carefully. Here's a detailed guide to help you understand how to open a leverage account at Fidelity, why you might choose to do so, and what you need to consider.

What is a Leverage Account?

A leverage account, often referred to as a margin account, allows you to borrow money from your brokerage to buy securities. This means you can purchase more than you could with just the cash in your account. However, using leverage can amplify both gains and losses. It is crucial to understand the risks involved before you open a leverage account.

Key Benefits of Using Leverage:

  • Increased Purchasing Power: Allows you to take larger positions than you could with cash only.
  • Potential for Higher Returns: If your investments perform well, your returns are magnified.
  • Flexibility: Provides more opportunities to diversify your investments or take advantage of timely opportunities.

Risks Associated with Leverage:

  • Increased Losses: If the markets move against you, your losses can exceed your initial investment.
  • Margin Calls: You must maintain a minimum balance (maintenance margin) to keep your position. If your equity falls below this, you may face a margin call where you need to deposit more funds or liquidate positions.
  • Interest Costs: Borrowed funds accrue interest, adding to your costs.

Steps to Open a Leverage Account on Fidelity

Step 1: Eligibility Requirements

Before opening a leverage account with Fidelity, ensure you meet their eligibility criteria:

  • Age Requirement: Must be at least 18 years old.
  • Account Type: Leverage or margin trading options are typically available on brokerage accounts, not tax-advantaged accounts like IRAs.
  • Creditworthiness: Good credit history and financial position are often prerequisites for approval.

Step 2: Understanding the Terms and Conditions

Fidelity has specific terms and conditions for margin accounts. It is essential to read through these to understand:

  • Interest Rates: Interest charged on borrowed funds.
  • Margin Requirements: The initial margin and maintenance margin requirements.
  • Eligible Securities: Not all securities are eligible for margin trading.

Step 3: Opening a General Fidelity Brokerage Account

If you do not already have a brokerage account with Fidelity, you need to open one:

  1. Visit Fidelity's Official Website: Go to the Fidelity investments homepage.
  2. Account Selection: Choose to open a "Brokerage & Trading" account. This account type supports margin trading.
  3. Application Process: Fill out the application form by providing personal information, financial situation, investment goals, and funding sources.
  4. Verify Identity: Submit necessary documents for identity verification as required by regulatory standards.

Step 4: Requesting Margin Capabilities

Once your brokerage account is active, request margin capabilities:

  1. Online Request: Log into your account and navigate to the accounts services section where you can apply for margin privileges.
  2. Review Contract: Carefully review the "Margin Account Agreement," making sure to understand the implications and responsibilities.
  3. Application Approval: Your application will be reviewed, and if approved, margin trading will be enabled. This process may take a couple of business days.

Step 5: Initial Deposit and Margin Funding

Once the margin account is set up, you’ll need to fund it:

  1. Deposit Funds: Transfer funds to your margin account. Ensure they meet Fidelity’s initial margin requirements.
  2. Leverage Limitations: Fidelity will define the leverage ratio — for instance, a common ratio is 2:1, meaning for every dollar of your own, you can buy two dollars’ worth of securities.

How to Use a Leverage Account

Example Scenario:

Suppose you start with $10,000. With a 2:1 leverage, you can invest $20,000 in securities. If the investment grows by 10%, your total investment becomes $22,000. After repaying $10,000 borrowed, your profit is $2,000 on a $10,000 initial investment, a 20% return.

Monitoring Your Account

  • Regularly Check Margin Levels: Ensure you are always above maintenance margin to avoid margin calls.
  • Assess Market Conditions: Be aware of market trends that might affect leveraged positions.

Frequently Asked Questions

What fees are associated with a Fidelity margin account?

Interest on borrowed funds is the primary charge, which varies based on the prevailing rate and the amount borrowed. There are also potential fees related to trade transactions and management.

Can I convert my existing Fidelity account to a margin account?

Yes, if you have an eligible brokerage account, you can request to add margin privileges by contacting customer support or submitting a request through your online account.

What happens if I fail to meet a margin call?

Failing to meet a margin call can result in Fidelity liquidating securities in your account to bring your account back to the required margin balance, possibly incurring substantial losses.

Is there a minimum balance requirement?

Yes, typically, a minimum balance is required to start using margin, often around $2,000, but this can vary based on specific brokerage terms or regulatory changes.

Key Considerations Before Leveraging

  • Financial Stability: Ensure you have the resources to cover potential losses.
  • Risk Tolerance: Align your leveraging strategy with your risk appetite.
  • Diversification: Use leverage as part of a diverse portfolio to manage risk.

Conclusion

Opening a leverage account with Fidelity can be a strategic move to enhance your investment potential, but it is simultaneously fraught with risks that require careful assessment and continual monitoring. Ensure you fully understand the implications and commitments related to margin trading before proceeding. For personalized advice, consult a financial advisor to ensure your trading strategies align with your broader financial objectives.