Did you know that you can borrow money off of your stock portfolio and that the interest paid on these loans can be very low, often as low as 5%? These sorts of loans are called margin loans.

 

Often, people use margin loans to buy more stock. For example, if they have a stock portfolio of $20k, they may borrow an additional $10k to buy more stock since they feel that the return from holding the stock outweighs the amount paid to borrow money.

 

However, you can also use margin loans for personal or other business expenditures. For example, if you have a $20k stock portfolio and you have a credit card balance of $1k, you may choose to borrow $1k on margin to pay off the credit card balance. This may be a wise thing to do since credit card interest rates are often much more than margin interest rates.

 

Be careful when borrowing money on margin though. A margin loan is a form of collateral loan; your stock is the collateral. Let’s say you own 1,000 shares of a stock trading at $20/share, so your portfolio is worth $20k. If you decide to borrow $5k on margin for personal needs, you’ll have equity of $20k and $5k of debt to your broker.

 

Let’s say the stock falls in value. If it goes down to $8/share, you’ll just have $8k in equity, but stil $5k of debt to your broker, so net equity of $3k. In this instance, your broker may force you to sell some of your shares to reduce the amount of debt to the broker. This can be very troublesome because you are forced to sell stock at a low price.  Brokers have different margin requirements, so it’s important to know what may trigger a margin call.

 

Margin borrowing is a low-cost way of getting money, based on your stock assets. You need to be careful though and not borrow too recklessly on margin. If you do, your broker will institute a margin call and force you to sell stock.