What is a Margin Account?
Are you interested in setting up a margin account with your brokerage? If so, there are many details to consider before you begin investing. How do you trade on a margin? What are the risks? These are valid questions that every investor should be asking.
Margin Investing Overview
Specifically, margin investing is the act of borrowing money to invest in a particular stock or security. And this is all possible through your brokerage.
According to Regulation T of the Federal Reserve Board, you can borrow up to 50 percent of the purchase price of securities that can be purchased on margin.
So, let’s say you are looking to buy a stock worth $50 a share with your margin account. It would cost you $25 per share. The other $25 would be paid out by the brokerage.
If the stock appreciates in value, your investment returns are higher than if you had bought it without margin. However, this works in reverse as well. You can lose your total investment at a faster rate and will have to pay off the interest as well.
The risks are clear. Without safeguards in place, you can actually lose more money than you invested in the first place. And most brokerages have their own margin trading rules that require minimum deposits and more.
The Financial Industry Regulatory Authority (FINRA) sets the minimum margin account deposit at $2,000 or 100 percent of the purchase price. Brokerages, on the other hand, can require you to deposit more based on their own set of rules or guidelines.
Where Can I Create a Margin Account?
Not all brokerages offer margin trading. But the best online brokerages do. For example, you can create your own margin account with brokers such as:
- TD Ameritrade
- Merrill Edge
- Charles Schwab
Now, these are the premier brokerages available today. Brokers such as Ally Invest, Webull and Vanguard also offer margin trading to investors. Even the successful mobile application, Robinhood, offers margin trading at a 5% interest rate.
And interest rates are the key to deciding where you want to open up your very own margin account. In general, these rates will fall somewhere between 5% and 10%.
And the bigger the trade, the lower the interest rate will become. For instance, E*TRADE will charge you 8.95% interest on any trade for less than $4,999. But that rate steadily drops as you spend more money. It becomes 7.45% if you spend between $100,000 and $249,999 and falls as low as 5.45% if you spend more than $1 million.
Trading on Margin
Trading on margin is not for everyone. Yet, it’s growing in popularity amongst investors across the country. The potential for massive returns is there if you are willing to take on more financial risk.
And there are many strategies, trends and insights to consider as an investor. For the latest investment opportunities, sign up for the Trade of the Day e-letter below. You may find the next big trending stock pick with our experts’ daily analysis.
It’s important to continue developing your knowledge of the stock market. A margin account can be full of risks, but the rewards may be worth it.