A margin account allows you to borrow from your broker rather than from your banker. Margin interest rates are generally 0.5 percent to 2 percent above the “broker’s call” rate, now set at 3.5 percent. Thus, interest rates currently range from 4 percent to 5.5 percent, with the lowest rates reserved for loans over $50,000.
You can use a margin loan for any purpose, from paying your child’s college tuition to financing a family vacation, so many people prefer the convenience of tapping a broker’s margin account rather than filling out a bank’s forms. Practically speaking, though, margin loans often are used to invest in more securities. For most securities, the maximum margin allowed is 50 percent: you can borrow up to $100,000 on margin if you have $200,000 worth of stocks, bonds, and mutual funds. Using margin will increase gains, if your holdings increase, but also magnify losses in a bear market.
Although the Federal Reserve and the New York Stock Exchange set the basic regulations, each brokerage firm has its own rules on margin. Some firms don’t allow margin on securities considered too speculative, such as stocks selling for less than $5 per share and certain volatile technology stocks. In addition to these restrictions, which vary from firm to firm, as a general rule investors can’t use margin in tax-deferred retirement accounts.
