Trading with Margin Accounts

[Music] a margin account has more features than a cash account and they're used by more active or experienced investors a key difference between a cash account and a margin account is that with a margin you can borrow funds to buy investments whereas with a cash you must pay for all purchases by the settlement date and because of this a margin account is an account you'll apply to and be approved for just like a loan or any other type of credit think of a margin account like a home equity line of credit or a heloc homeowners who have a heloc use the value of their home as collateral or leverage to give them a line of credit they can then use that line of credit for whatever they like like home renovations or a trip typically a heloc will allow you to borrow up to 65 of the market value of a home with a margin account investors use their investments as collateral if they go to buy stock they would pay up to at least 30 percent of the cost and the broker would lend the remaining 70 depending on the value of the investment they're looking to buy like a heloc the investor must pay interest on the loan also it's important to note that using a margin is completely optional you can have a margin account and never end up using any margin if you choose to pay for all of your investments with your own money the choice is completely up to you let's look at how borrowing would work if you intend to buy five thousand dollars of a stock that has a margin rate of thirty percent you could put down as little as fifteen hundred dollars plus commissions and borrow up to thirty five hundred dollars this is called leverage leverage may amplify the returns you make on your money invested on the other hand it could also amplify your losses for example if you use fifteen hundred dollars of your own cash to buy fifteen hundred dollars a stock you'll make five percent on your investment if the stock moves up five percent in this case that would be seventy five dollars but if you bought five thousand dollars worth of stock with fifteen hundred dollars of your own cash and a stock moves up five percent what happens the five thousand dollars invested is now worth five thousand two hundred and fifty dollars this means you've made two hundred and fifty dollars on your cash investment of fifteen hundred dollars this would be a return of sixteen point six percent on your capital before deducting any amount paid for interest the opposite would be true if the stock went down five percent this is where the similarities between a margin account and a heloc end they differ when it comes to how often the loan amount changes in value with a heloc if the value of your house goes up or down the value of the house used for the loan tends to be less frequently reassessed with a margin account your investments are always changing in value so the amount you can borrow can change daily at a minimum you should know that the amount you can borrow on margin is not unlimited in fact there are maximum caps you can borrow for specific investments for example a stock with a 30 margin rate has a 1.5 million dollar maximum loan value this means that the most cd direct investing can lend is 1.5 million dollars this is the equivalent of buying 2.14 million dollars of stock and receiving a loan of 1.5 million dollars at 70 this is probably a scenario that few will run into but there are stocks that could have smaller limits for example stocks with a 75 margin requirement and a 25 loan value can only have a loan value of 100 000 if what you buy costs more than the maximum loan value you can you just have to cover the outstanding cost with your own cash that's sitting in the account the maximum cap amount that a broker will lend you is called concentration guidelines and you can read more about that and other margin requirement details on our website any available margin you have is called margin excess this usually means you have more borrowing funds available against your current investments that you can put towards buying more investments but if your available margin excess drops down and it's in the red you're in something called a margin call if this happens you need to deposit funds into your account or liquidate some investments to bring your margin back into green waiting too long might impact the ability for you to continue to hold your investments many investors who use most of their available margin will monitor their accounts closely to try and prevent falling into a margin call if you're tempted to use all or most of the available margin think about if you're providing yourself with enough room to allow your account to fluctuate in value for example if you use all your margin to buy stocks today and over the next three days those investments go down 10 you'll be in a margin call you'll need to either sell at a loss or deposit funds to cover that shortfall if you had left some buffer room to allow your portfolio to fluctuate you may not have fallen into the margin call we'll go over this in more detail in our margin calculations video you can now see how a margin account is different than a cash account another key difference is that more advanced trading strategies and investment types are available with a margin account whereas a cash account has some limitations for example a margin account lets you trade options and short these are strategies we'll explore in other videos now that you understand how a margin account works we'll delve a little deeper in our next video we learn how to do simple margin calculations so you're ready to take on your first margin trade [Music]

Channel: TD

Views: 33,561

Rating: 4.8411913 out of 5

Keywords: margin account, margin, leverage, borrowing funds, cash account, mark-to-market, buying power, margin balance, margin call, direct investing, WebBroker

Id: 90e236IdOB4

Length: 6min 20sec (380 seconds)

Published: Wed Sep 16 2020