What is a Margin Loan?
A margin loan or a margin account is a loan made by a brokerage house to a client that allows the customer to buy stocks on credit. The term margin itself refers to the difference between the market value of the shares purchased and the amount borrowed from the brokerage. Interest on the margin loan is usually calculated on the outstanding balance on a daily basis and charged to the margin account. As time goes by, the outstanding debt goes up and interest charges accumulate. Also, the brokerage holds the securities as collateral for the loan. A simple example of a purchase on margin might be an investor buying stocks with a market value of $10,000 but only using $5,000 of their own money. The other $5,000 would be provided by the brokerage as a margin loan. Sounds straightforward, but margin loans aren’t simple. If you want to trade on margin, the first thing you need to do is open a margin account. By law, this requires an initial investment of at least $2,000. But that amount could
A margin loan lets you borrow money to invest in shares and other financial products, using existing investments as security. Borrowing money to invest in this way, also known as ‘gearing’, can increase the gains from an investment, but also multiply the losses. Margin loans are offered by a wide range of financial institutions and are often available online. How do margin loans work? Let’s take shares as an example. When you borrow money to buy shares, there is a risk that the shares fall in value and you cannot repay the loan. To reduce this risk, margin lenders take security (ie a mortgage) over the shares you buy with the loan, so that the shares can be sold to repay the loan. This is no different from what happens when you borrow money to buy a house, except the share market rises and falls more rapidly than the housing market. Because share prices move frequently, both you and the lender are also exposed to the risk that the shares might fall in value. If this happens, the shares
