This article explains how trading on margin works, what it costs (including why margin interest can matter more than commissions), how margin functions as a flexible line of credit and the key requirements and risks to understand. Next step: If you’re considering margin, open an Investrade margin account (or log into your existing account), review the margin agreement and current margin rates and enable margin before placing a trade or drawing on margin credit.
What Is Margin Lending?
Margin lending allows investors to borrow money using the securities in their brokerage account as collateral. This borrowed capital can be used to purchase additional investments or accessed as a flexible line of credit for other financial needs.
Rather than selling existing holdings to raise cash, margin lending enables investors to stay invested while accessing liquidity. Funds borrowed on margin can be used for investment purposes or for personal needs, depending on the investor’s objectives and risk tolerance.
Margin lending is not suitable for all investors, and understanding how margin works – including its risks – is essential before using it.
Thinking Beyond Commissions When Using Margin
For many investors, the cost of margin interest can have a greater impact on overall returns than trading commissions. If you carry a margin balance, the interest rate applied to that balance plays a meaningful role in the long-term cost of borrowing.
Investrade’s margin rates are designed to remain competitive by referencing a range of commercial interest rates, cost factors and market conditions. Margin rates are subject to change, and investors should regularly review how borrowing costs may affect their portfolio over time.
Benefits of Margin Lending
Margin lending functions as a flexible line of credit secured by existing investments. Compared to many traditional consumer lending options, margin loans may offer lower interest rates and faster access to funds.
However, margin borrowing involves risk, and investors should carefully evaluate whether margin aligns with their financial situation and investment strategy.
Key benefits include:
- Increased purchasing power – Margin allows investors to use existing securities as collateral to access additional capital without selling current holdings. This can support new investment opportunities or portfolio diversification.
- Liquidity without liquidation – By borrowing against securities, investors may raise cash for investment or personal needs while remaining invested in their portfolio.
- Flexible use of funds – Margin loans can be used for a range of purposes, including purchasing securities, covering short-term cash needs or accessing funds for other financial priorities.
- No fixed repayment schedule – As long as required equity levels are maintained, margin loans do not require set monthly payments. Interest accrues based on the average daily balance and is added to the account.
- Potentially lower borrowing costs – Depending on market conditions and loan size, margin interest rates may be more competitive than other forms of consumer credit.
Using Margin as a Line of Credit
Using a Margin Loan for Convenience
Using margin requires an approved brokerage account and a completed margin agreement. Once approved, margin access is built directly into the account. To qualify, investors must maintain at least $2,000 in account equity.
Margin eliminates the need for separate loan applications or external credit approvals when borrowing against eligible securities.
Using Margin Loans With Flexibility
Margin loans do not have a fixed repayment schedule as long as required equity levels are maintained. Interest accrues based on the average daily debit balance and is added to the margin balance monthly.
This structure allows investors to manage repayments based on their financial situation rather than on a predetermined schedule.
Accessibility and Liquidity When Using Margin
Once a margin account is approved, investors are not obligated to borrow. Funds become available when needed, and for short-term cash needs, borrowed funds are often accessible as soon as the next business day.
Margin Lending for Investment and Personal Use
Using Margin Lending for Investment Purposes
When used for investment purposes, margin lending can expand purchasing power and provide access to additional investment opportunities.
Common investment-related uses include:
- Increasing portfolio exposure without liquidating existing positions
- Supporting diversification across additional securities
- Temporarily covering settlement obligations
While leverage can amplify gains, it can also magnify losses. Investors should carefully consider their risk tolerance before using margin to invest.
Using Margin Lending as a Personal Line of Credit
Margin lending can also serve as a source of liquidity for non-investment needs. Because funds are borrowed against existing securities, investors may be able to access cash without selling assets and potentially triggering taxable events.
Common personal uses include:
- Short-term cash needs or unexpected expenses
- Debt consolidation or tax payments
- Auto financing
- Home improvements
- Education expenses
- Business-related funding
By borrowing against their portfolio, investors may defer capital gains that could result from selling securities to meet cash needs.
Managing Margin and Margin Requirements
Regulatory rules govern how much can be borrowed on margin and how much equity must be maintained. In most cases, investors may borrow up to 50% of the value of marginable securities, subject to approval and eligibility requirements.
Buying power and available margin fluctuate as the market value of securities changes. Margin is available on most brokerage accounts but is not offered for certain account types, including IRAs and custodial accounts.
Risks Associated With Margin Lending
Margin lending involves significant risk and is not appropriate for all investors. Securities purchased on margin serve as collateral for the loan. If the value of those securities declines, the value of the collateral also declines.
If account equity falls below required maintenance levels, the brokerage firm may issue a margin call or liquidate securities in the account without prior notice to restore required equity.
Before using margin, investors should carefully review their margin agreement and fully understand the potential risks, obligations and consequences of borrowing on margin. Consulting with a financial professional may also be appropriate.