What is a Margin Interest Rate?
When investing, there are occasions when the investor will wish to purchase securities that exceed the amount of cash available in the account. When this happens, the brokerage will extend a loan, commonly known as margin, to the investor in order to complete the transaction. Of course, the brokerage firm will charge and interest rate on this loan in order to cover its costs and make a profit.
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Function
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A margin interest rate provides the brokerage, who is the lender, with compensation for issuing an on demand loan to the account holder. This rate covers both the cost of administering the loan and a profit, or spread, for the firm.
Benefits
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A margin loan provides the account holder with the ability to access additional capital when necessary. Such loans do not require approval and are made in real time thus relieving the investor of the burden of either keeping capital on hand, or risking missing out on an opportunity while taking time to secure credit.
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Features
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A margin loan can only be made in a margin approved account. These loans are secured by the securities held within the account and are subject to various regulations, including how much credit can be extended based on the time of securities held within the account.
Considerations
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Margin interest rates are generally higher than similar secured loans, so if time is not of the essence and the funds will be used for a longer period of time, an alternate loan might be advisable.
Warning
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Margin loans are subject to various regulations and the rules of the company which holds the account. If the value of the securities within the account drops, the investor may be required to repay the loan (or part of it), or deposit additional funds or securities within just a few days. This is known as a margin call.
Size
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While margin loans are subject to many rules and regulations, the simplest is that for regular stock securities, the amount of cash and stock held in the account must equal 50% of the total value of the account including the loan at the time the loan is made. This number may be adjusted depending upon the volatility of the securities held.
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