When you get a margin loan from your broker, you’re gaining access to a low-interest line of credit secured by investments. You shouldn’t rely upon margin loans to finance an extravagant lifestyle. On the other hand, margin may be worthwhile if used for solid investments such as real estate, proven stocks, or the exercise of stock options.
As a rule of thumb, you should control your risks by keeping margin down to no more than 15 percent of your portfolio. If the loan balance is pushed to the limit (50 percent of portfolio value), you risk a margin call, which means you must put up more cash or securities. When you get margin calls, consider them to be yellow flags, indicating you should proceed with more caution.
If you get margin calls, here’s how to slow down:
* Don’t borrow any more on margin.
* Negotiate with your brokerage firm for a lower interest rate or shop around for a lender with better terms.
* Pay off the loan, even if it takes you three years to do so.
* Once the loan is paid off, keep your margin loans down to a moderate level.
