Investing Advice

Margin Loans and Investment

Your broker wants to lend you money, lots of money, using your stocks as security. You can use the money for whatever you want - anything. The interest rate is usually under 10% a year, which is reasonable. This is called a margin loan.

If you have at least $5,000 (a few allow as little as $2,000) in cash and investments in your account, you can use available margin to increase your profits. But using margin doubles your risk!

Federal regulations allow up to 75% of your account to be margined. Most brokers hold the line at 65% (new accounts 50%), with your equity being 35%, and most brokers won't count stocks trading at under $5.00 as part of your equity.

If the value of your account drops below the broker's minimum percent, you would receive a "margin call" asking you to add more cash. If you can't bring your account up to snuff, the broker will sell shares to cover the loan and interest.

Available margin is called "buying power", and is not the same as "cash available". Each broker has his own way of calculating your buying power, and they base it on your length of time with the broker, the size of your account, and the quality of your securities.

Speculators use margin to try to double their profits. This is very risky. If you guess wrong, you are doubling your losses, even wiping out your original investment. Margin is not for new investors.

Other Stock Market Basics Topics:

  1. Stock Market Basics
  2. Why invest in the stock market?
  3. Why Sell Stock?
  4. How are shares bought and sold on the NASDAQ?
  5. How stocks are traded on the New York Stock Exchange
  6. What are ECNs?
  7. Supply and Demand
  8. American Stock Exchanges
  9. International Stock Exchange
  10. What fuels demand for a stock?
  11. More to Know About Stock Trading
  12. Limit Orders
  13. Market Capitalization
  14. Preferred Stock
  15. How to Buy Stock?
  16. How much money do you need to open a brokerage account?
  17. Money Market Funds
  18. Margin Loans and Investment
  19. Corporation Executive Pay
  20. How much money do you need to open a brokerage account?

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