Most financial services firms allow you to borrow against your investments simply by filling out some paperwork. Borrowing against your investments can be an easy way to raise cash, as there are usually few, if any, restrictions on the use of the borrowed money. Some investors borrow against their accounts to provide leverage for their investments, since if you borrow half the value of your account, the percentage moves in your account are doubled. Depending on the size of your investment loan, your interest rate may be lower than you could get on other types of loans.
Open a margin account. Borrowing against your investments is also known as borrowing on margin. Your brokerage firm will require you to complete a margin application and agreement, indicating you understand the risks involved with margin loans. The Financial Industry Regulatory Authority requires you to keep at least $2,000 or 100 percent of the value of the securities in your account, whichever is less. Once your firm accepts your application, you can begin to borrow against your investments.
Withdraw any amount up to the initial margin limit. Regulation T of the Federal Reserve Board requires you to keep at least a 50 percent margin in your account when you first borrow money. For example, if you have $10,000 in investments in your account, you cannot borrow more than $5,000. Individual firms may have higher initial margin limits. Some securities are not marginable, meaning you cannot include their value in the calculation of how much you can borrow.
Maintain enough equity to avoid maintenance margin levels. If the investments in your account go down in value, your margin percentage increases. At all times, FINRA requires you to keep equity in your account of at least 25 percent, and many firms raise that requirement to 30 or 40 percent. Let's say your stocks were originally worth $8,000, and you took out a margin loan of $4,000 against them. If the stock value fell to $5,000, your net equity would be $1,000, or 25 percent, since $5,000 minus $4,000 equals $1,000. If your firm had a maintenance margin level of 30 or 40 percent, the firm would issue you a margin call, requiring you to deposit additional money.
Keep enough cash in reserve for margin calls. If you receive a margin call for maintaining insufficient margin, you must immediately deposit more money into your account. If you do not meet your margin call, the firm has the right to liquidate any securities in your account it needs to in order to satisfy the call.
Take your tax deduction. One of the benefits of borrowing on margin is that you can usually deduct at least part of the interest you pay. The IRS allows you to deduct all investment interest that exceeds 2 percent of your adjusted gross income, up to the amount of your investment income. Investment interest includes margin interest. Certain other limitations apply, including the provision that you cannot deduct margin interest when the funds are used to purchase tax-exempt securities.
- If you have a 401(k) plan, you can typically borrow up to 50 percent of the value of your account without having to open a margin account.
- Margin magnifies both gains and losses in your account. A large downward move in stock prices could wipe out your entire portfolio.
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