Margin Account Basics
A margin account is offered by brokerages and allows investors (that's you) to borrow money to buy securities. The securities are then used as collateral against that loan, and the broker charges interest for the balance of the loan. In a simplified example, an investor might put down 50% of the value of a purchase and borrow the rest from the broker.
The important thing to understand about trading with a margin account is that it comes with a serious amount of risk. Margin is leverage, which means that both your gains and losses are amplified. Margin is great when your investments are going up in value, but the double-edged sword of leverage really hurts when your portfolio heads south. Because margin exposes you to extra risks, it's not advisable for beginners to use it. Margin can be a useful tool for experienced investors, but until you get to that point, play it safe.
How are the interest charges calculated on my margin account?
The interest rate you pay on your margin loan balance depends on a couple of things:
- The base rate - This rate is subject to change without notice.
- Your margin loan balance - AKA how much you have borrowed from us. The amount of your margin loan changes the amount of interest you pay; a higher loan balance may result in a lower interest rate.
You can use this handy dandy formula to calculate your margin interest:
Daily interest charge1 = (interest rate/365 days) X (loan balance) 1 This value is not compounded
Margin interest begins to accrue on the settlement date for trades, and is calculated using the end-of-day balance for each calendar day that your account has a loan balance. For calendar days which fall on Saturdays, Sundays or market holidays, the previous market day's end-of-day loan balance will be used. Margin interest is posted to your investment account once a month, but if the margin annual rate changes, your account may show multiple postings for margin interest, with a different rate for each posting.
Margin Eligible Securities
Although a lot of stocks and ETFs can be bought on margin, some securities available to purchase in your investment account aren't margin-eligible. We also apply our own criteria that meet or exceed the Federal Reserve Board's requirements to decide which securities can be bought on margin. Penny stocks, IPOs, extremely volatile stocks, and options are examples of securities that cannot be bought on margin.
Initial Rate (initial margin requirement)
The initial rate for a security, i.e. the initial margin requirement, is the percentage of cash or marginable securities needed in your account against the total purchase price of a margin eligible security. The majority of securities that can be purchased on margin have an initial rate of 50%, but we might require a higher initial rate for some securities based on perceived risk. On an account level, you're required to have a minimum equity balance of $2000 to begin using margin.
Fun Fact: The 50% minimum is established by Regulation T of the Federal Reserve board. Regulation T is a Federal Reserve Board regulation that governs Customer cash accounts (non-margin accounts) and the amount of credit that brokerage firms (that's us!) extend to Customers to purchase securities in margin accounts. Regulation T states you can borrow up to 50% of the purchase price of margin eligible securities. The buying power balance shown on our website is calculated using an initial rate of 50%. Securities you buy that require a higher initial rate will reduce your account's buying power.