Margin Benefits
Margin trading involves borrowing against securities you already own to purchase additional securities. By leveraging your assets, you can potentially realize greater investment returns.
When you borrow on margin, you can take advantage of the following:
- Competitive interest rates — The margin rate you pay depends on your outstanding margin balance — the higher your outstanding balance, the lower the margin rate you are charged. View the most current margin rates.
- Repayment flexibility — There is no set repayment schedule as long as the required level of equity is maintained in your account. Interest charges on outstanding balances are posted to your account monthly. Any cash dividends (not enrolled in dividend reinvestment) and interest received will be automatically applied to your margin balance.
- Convenience — Borrow for any purpose, at any time. Once you have been approved for margin borrowing, there are no additional forms to complete, application fees to pay, or loan officers to consult.
- Tax-deductible interest — Interest on margin loans may be tax deductible. Consult your tax advisor for details regarding your particular situation.
Leveraging Assets for the Potential of Greater Returns
Margin borrowing lets you leverage securities you already own to purchase additional securities. By leveraging your assets, you can potentially realize greater investment returns.
Example: Suppose you use $5,000 in cash and borrow $5,000 on margin to purchase a total of $10,000 in stock. If the stock rises in value to $11,000 and you sell it, you would pay back the $5,000 borrowed on margin and realize a profit of $1,000. That's a 20% return on your $5,000 investment.
If you didn't take advantage of the margin loan, you would have paid $10,000 in cash for the stock. Not only would you have tied up an additional $5,000, but you would have realized only a 10% return on your investment. The 10% difference in the return is the result of leveraging your assets.*
How leverage can improve your return for stock you buy at $10,000 and sell at $11,000.*
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Margin Risks
Margin investing carries greater risks and may not be appropriate for every investor. Before you use margin, carefully review your investment objectives, financial resources, and risk tolerance to determine whether margin borrowing is appropriate for you.
Two of the risks associated with margin borrowing are:
- Leverage risk
- Maintenance call risk
Leverage Risk
Leverage works as dramatically when stock prices fall as when they rise. For example, let's say you use $5,000 in cash and borrow $5,000 on margin to purchase a total of $10,000 in stock. Suppose the market value of the stock you've purchased for $10,000 drops to $9,000. Your equity would fall to $4,000, which is the market value minus the loan balance of $5,000. In this instance, you could suffer a loss of 20% due to a 10% decrease in market value.*
Maintenance Call Risk
If the securities you hold fall below the minimum maintenance required, your account may incur a margin call. Margin calls are due immediately. It's smart to leave a cash cushion in your account to help reduce the likelihood of a margin call.
Sometimes you may face higher maintenance minimums, especially when the securities you're holding carry additional risks, such as concentration risk.
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