A:

Interest rates on margin accounts vary according to the size of the loan and the brokerage firm being used. Generally, interest rates are lower than those for unsecured personal loans or credit cards. Also, there are no specified repayment schedules. Interest charges on margin accounts accrue monthly, and the principal can be repaid at the investor’s convenience. Interest on margin accounts is also sometimes tax deductible if taxable investments are purchased with margin loans.

Margin Accounts

Investors who use a brokerage firm have the ability to sign a margin agreement, which gives them the opportunity to borrow a maximum of 50% of the purchase price of marginable investments. Essentially, investors have the chance to use margin to gain a potentially doubled quantity of marginable stock, compared to the amount they could gain using cash.

The amount an investor can borrow fluctuates daily because margin uses the value of the investor's cash and marginable securities as collateral. As an investor’s portfolio goes up, borrowing power increases. And if an investor’s portfolio drops in value, buying power on margin decreases.

Benefits and Weaknesses

Interest on margin accounts, as well as all the specific terms for buying on margin, is dependent on the brokerage firm an investor uses. One positive aspect is margin interest is generally a lower rate, lower than the rate an investor could secure for a personal loan. Also, interest charges, as well as the loan principal amount, can usually be paid off at the investor’s discretion. Margin is a double-edged sword for investors, however. While margin has the ability to significantly magnify an investor’s profits, it also has the power to substantially magnify losses.

RELATED FAQS
  1. How exactly does buying on margin work and why is it controversial?

    Learn how purchasing stock on margin works, and understand the risk associated with margin accounts that make the strategy ... Read Answer >>
  2. What is a margin account?

    A margin account is an account offered by brokerages that allows investors to borrow money to buy securities. An investor ... Read Answer >>
  3. What's the difference between profit margin and operating margin?

    Find out the differences between a company's gross profit margin, net profit margin and operating margin, and what each metric ... Read Answer >>
  4. What happens if I cannot pay a margin call?

    Minimum margin is the amount of funds that must be deposited with a broker by a margin account customer. With a margin account, ... Read Answer >>
  5. What are my options when I get a margin call?

    Understand what a margin call means and the two primary options for meeting a margin call, such as depositing additional ... Read Answer >>
Related Articles
  1. Investing

    Buying on Margin

    When an investor buys on margin, he or she pays a portion of the stock price – called the margin -- and borrows the rest from a stockbroker. The purchased stocks then serve as collateral for ...
  2. Investing

    Explaining Initial Margin

    Initial margin is the percentage of a stock’s price an investor must have in his account to buy that stock on margin.
  3. Financial Advisor

    Margin Investing Gets A Bad Rap, But For The Thrill-Seeker, It's Worth It

    Investing on margin can be profitable but it's a risky play that needs care.
  4. Managing Wealth

    What’s a Good Profit Margin for a New Business?

    Surprisingly, the younger your company is, the better its numbers may look.
  5. Investing

    Leveraged Investment Showdown

    Margin loans, futures and ETF options can all mean better returns, but which one should you pick?
  6. Financial Advisor

    Margin Call

    Find out why a margin call is so important to investors.
RELATED TERMS
  1. Margin

    1. Borrowed money that is used to purchase securities. This practice ...
  2. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin ...
  3. Initial Margin

    The percentage of the purchase price of securities (that can ...
  4. Buying Power

    The money an investor has available to buy securities. In a margin ...
  5. Margin Account

    A brokerage account in which the broker lends the customer cash ...
  6. Margin Loan Availability

    1. The dollar amount in an existing margin account that is currently ...
Hot Definitions
  1. Leveraged Buyout - LBO

    The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. ...
  2. Current Assets

    A balance sheet account that represents the value of all assets that can reasonably expected to be converted into cash within ...
  3. Tax Liability

    The total amount of tax that an entity is legally obligated to pay to an authority as the result of the occurrence of a taxable ...
  4. Preferred Stock

    A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares ...
  5. Net Profit Margin

    Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage ...
  6. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
Trading Center