When you are willing to buy an amount of stocks for which you can’t completely fund, then you may be able to borrow the money you require from your broker. Such type of loan is referred to as margin loan. And, similar to any other loan, it comes with an interest rate.

Interest rate for Margin Loan

Individual brokers  determine the interest rate that they will charge for a margin loan, but generally it’s based on the broker’s call, which is also referred to as the broker’s call rate, call loan, or call loan rate. This rate is published in the Wall Street Journal on daily basis.

Through Margin account you can invest more

When you have signed up for a margin account with your stock broker, then by borrowing the money from your broker you would be able to purchase more stock as compared to what you can actually pay for.

Stock you own serves as security for Margin loan

The cash and/or stocks that is own by you in the account are considered as security for the loan. In fact, broker’s usually impose a minimum equity amount in order to be eligible for the loan. This amount is generally around 35%.

That is, the value of the stock you own minus the amount you owe must be at least 35% of the total value.

Interest rate charged by broker

The interest rate that is charged by the broker can be over or under the broker’s call rate. Generally it is  plus or minus one or two percent but it can be more than that also.

Broker’s call is a variable rate

The broker’s call is a variable rate, what it means is that based on the underlying interest rate index it might shows fluctuations. The underlying interest rates are the prime rate set by the Federal Reserve. Their might or might not be a variation in a broker’s call rate during the life of the loan. The loan may be long term or short term.

Investors should know all the pros and cons of Marginal Loans

Before engaging in any such investments the investors should be careful. Since the loan is secured by the value of the stocks in your account, if there is a sudden drop in the value of stocks, the broker may issue a margin call.

Margin Call

Issuing a margin call means the broker may require the investor to provide more money. If in case the margin investor is unable to do this, the stock broker has the right to sell stock from the investor’s account until the loan is repaid.

Risk in Margin Loan

If the broker sells a stock then this can be harmful for the investor as this is usually the worst time for the investor to sell the stock. Unluckily, if the loan cannot be repaid there is no other choice for the investor . This is what we call risk in Margin Loans.

Loans from Banks are better than Marginal Loans

Investors who need money for their investment should get a loan from a traditional bank, rather than taking a marginal loan. Although the bank’s interest rate will likely be higher than the broker’s call rate. But this decision is still far better due to the fact that the bank will give you a fixed rate rather than a variable rate as what you get in the case of a broker’s call.

Before taking a marginal loan,  Investor’s should weigh the risks of going with a margin loan versus other loan options, and then take decision wisely!

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