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.

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