Investing means risking your hard-earned money on securities that might rise or fall in value. To open a brokerage account, you'll have to put up cash. Although a margin account will allow you to trade with borrowed money, buying stocks with a credit card normally isn't an option: Most brokers and online trading firms won't allow it.
You need to open a trading account to buy and sell stocks. The brokerage handling your account requires an initial deposit to get the account up and running. This means a cleared personal check, a certified check, a money order or an electronic funds transfer from your bank account (usually the quickest and easiest option). Brokers generally won't accept a charge on your credit card to fund the account or to deposit additional funds.
Your credit card might allow cash advances if you need money to fund a brokerage account, but a high rate of interest is charged on cash advances. When you trade with borrowed money, you risk a loss of capital on the investment in addition to having to make the interest payment — plus late fees, if you miss a payment. The interest is a loss if your investment doesn't rise beyond the interest rate charge. That's a tall order for any stock trader, and there are more economical ways to trade with borrowed money.
A margin account allows you to borrow up to half of your transaction cost from the broker. Margin accounts represent a higher risk on the money you put into the account, but they also have a potential for higher returns. If the stock you buy with a margin account falls in value, you might get a margin call from the broker for more cash. If you can't provide the funds, the broker has a right to sell your investments at the market price without your permission. Interest on margin accounts can vary, but is usually lower than typical credit card interest rates. TD Ameritrade, for example, currently has a base interest rate of 8.25 percent.
Requirements and Costs
Before most brokers open a margin account or extend credit, they typically require a minimum cash balance. At Schwab, for instance, you can only convert your account to a margin account once you have cash or eligible securities of at least $2,000. Once you have enough in your account, you can borrow up to 50 percent of the amount you have in the account, as long as you maintain a minimum balance of $2,000 at all times.
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