Business & Finance Renting & Real Estate

What are Margin Loans?

    How to Get a Margin Loan

    • To get a margin loan, you must have a margin brokerage account. Brokers offer two types of accounts: cash and margin. An investor must apply for a margin feature when opening a brokerage account. Approval criteria vary by broker but are usually pretty liberal, because a margin loan is secured by account securities and the broker maintains control over the account.

    Initial Margin Requirements

    • Initial margin requirements, or the maximum limits that can be borrowed by using securities as collateral, depend on the type of security or securities pledged. The initial margin requirement for stocks is 50 percent; it is lower for other types of securities such as corporate or U.S. government bonds.

    Minimum Account Equity Requirement

    • Since the prices of securities fluctuate, Reg. T stipulates the minimum account that equity investors must maintain at all times. For example, if an investor buys $10,000 worth of stock on a 50 percent margin by depositing $5,000 in cash into his brokerage account and borrowing the other $5,000 from the broker, his account equity is $5,000, or 50 percent of the value of the stock. If the value of the stock declines to $6,500, he still owes $5,000 to the broker, so his account equity falls to $1,500, or 23 percent of the total. If the minimum equity requirement for stocks is 25 percent, the investor will get a margin call from his broker -- a demand to bring the equity back above 25 percent by depositing more money or selling some shares to reduce the margin loan.

    Two Ways to Borrow on Margin

    • An investor may deposit $5,000 in cash in his brokerage account and buy $10,000 worth of stocks on a 50 percent margin. Conversely, if an investor owns $10,000 worth of stocks in his account fully paid for, he can withdraw up to $5,000 in cash by going on a 50 percent margin.

    Margin Loan Terms

    • Margin loan terms vary by broker. Each broker has a credit, or margin, department that determines which securities are marginable and the maximum amount that can be loaned against them. Broker margin loan terms must comply with minimum Reg. T requirements, but many brokers add an additional layer of protection by setting more stringent terms. Margin interest is usually charged on a sliding scale: the more you borrow, the lower the rate. As long as an investor has sufficient equity in his account, he does not have to make interest payments -- the margin interest is automatically added to the margin loan balance.

Leave a reply