What does a margin account allow investors to do?

A margin account is a special type of brokerage account that allows investors to borrow money from a brokerage firm to purchase securities. This borrowing enables investors to buy more securities than they would be able to with their available capital alone, essentially allowing them to leverage their investments. The securities bought on margin serve as collateral for the loan.

By using a margin account, investors can take advantage of price movements in the securities market more aggressively; they can amplify potential returns since they are able to invest a larger amount than they could using only their cash. However, while this increases the potential for profit, it also heightens risk since losses can similarly be magnified. If the value of the securities declines, investors may face a margin call, requiring them to deposit more cash or sell securities to cover the loan.

Options that pertain to participating in futures contracts, exchanging stocks for dividends, or redeeming shares at market value do not specifically relate to the unique benefits provided by margin accounts. These relate more to other financial instruments or actions taken in different types of accounts or investment situations. Thus, the correct choice accurately describes the primary function of a margin account in allowing investors to buy securities on credit.