When you need to borrow money, you might qualify for an unsecured personal loan, but you can typically get better terms and interest rates with a secured loan. A margin account with your investments broker is a type of secured loan that uses your investments as collateral. While many investors use margin accounts to buy additional securities, no law says you have to. You can use a margin loan for just about anything you wish.
Before you can borrow money on margin, you must set up a margin account with your investments broker. The rules governing margin accounts come from a number of different sources including the federal government, the Federal Reserve Board, the Financial Industry Regulatory Authority and different stock exchanges. Each brokerage firm can add its own layer of rules to the mix. These rules will be contained in the margin agreement you must sign when you open your margin account. The U.S. Securities and Exchange Commission recommends reading and understanding the agreement before you sign it.
Your margin account is separate from your regular investment account, and you'll have to complete a new application agreement with your investments broker. You'll have to provide certain personal information, such as your name, address, contact information and Social Security number. You might have to provide certain financial information, such as your income and net worth, and acknowledge that you understand the risks associated with margin accounts.
Funding Your Account
Investments brokers typically require you to fund your margin account with a minimum of at least $2,000 in equity. This can be in the form of cash, cash equivalents or marginable securities, such as certain stocks and bonds. Once your margin account is funded, you can borrow against the investments in the account.
You can typically borrow up to 50 percent of the equity in your margin account. You can use the proceeds from the margin loan to invest in additional securities through your broker, or you can take the money in cash and use it however you wish. For example, you can use the proceeds to buy a new car or to make needed repairs to your home. Each brokerage firm sets its own terms regarding the interest rate charged against your margin loan.
Your margin account must maintain a set level of equity. FINRA regulations place the minimum level at 25 percent, but your broker might have higher house-rule maintenance requirements. If the market value of the investments in your margin account declines below that level, your broker will issue a margin call. You'll have to deposit additional cash or marginable securities to bring the equity in your account up to minimum levels. If you are unable to do so, your broker will sell the investments in your margin account until those levels are reached.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.