First and for all, margin accounts are for experienced investors. Brokers extend to some clients money for the stock market. For most investors, it is required to open a cash account and gain some experience before opening a separate margin account. Those who trade on margin, use their brokers’ money. Brokers set the rules and we have to abide by them. Hence, why it is for experienced investors. There is an additional risk level when playing with someone else’s funds. Let’s dig deeper into margin accounts, their characteristics, and how margin rates affect buying power.
Margin is credit given to investors on behalf of a broker. Every country has regulations regarding margin accounts.
Brokers will perform higher due diligence before allowing anyone to open a margin account.
In the US, everyday customers can access up to double their account balance for overnight trades and quadruple for day trades. This is your buying power. In other words…
Client A has $10,000 in his margin account. He has access to $20,000 for any trade done outside of normal trading hours. Client A also has access to $40,000 for any trade done during trading hours and closed on the same day it was opened.
Portfolio margin is for clients with a balance exceeding $100,000 in their account. More on that later. But it’s important to understand how margin rates affect buying power.
How Margin Rates Affect Buying Power Risks
Do you know how margin rates affect buying power? One of the biggest risks of margin trading is that it’s someone else’s money. Brokers decide the terms and they can pull the plug at any moment. They can do so for a variety of reasons.
The security might be too risky, there isn’t enough collateral or the trade is in the red. The broker has a lot of power unless you are performing.
Brokers don’t even need your permission to liquidate a position. They don’t look at the portfolio globally. Each trade is separate from the rest. One final risk is the necessity to pay back interest on the money used.
We will talk later about which brokers are the best in the game with the lowest interest rates. An investor with a $10,000 trade might end up owing money and losing more than 100% of the investment.
Investor B has $5,000 in her margin account. The broker offers him another $5,000, for a total of $10,000. She purchases 1000 shares of Stock A for $10 each. The following day, the stock falls to $4. The broker can issue a margin call, demanding that more funds be deposited in order to keep the investment.
Currently, Investor B lost her original $5,000 and owes an additional $1,000 to her broker excluding commission fees and interest. Failure to comply with the broker will result in a margin call. Failing to turn a profit on a margin account can quickly become a headache.
Do you how margin rates affect buying power? Margin trading also has its rewards. Successful investments come with huge profits. Investors have access to more funds to generate more profit when trades are successful.
Margin accounts can also be used as a line of credit for emergency funds. Since the money can easily be transferred, clients only have to pay interest.
Best Brokers for Margin Accounts
We will begin by comparing margin rates across brokers. Then you’ll know how margin rates affect buying power The figures below are based on an account balance of $100,000 as of April 4th, 2022.
Additional information is available via the hyperlinks. Smaller accounts will have higher rates, but not too different from the ones below. The cheapest broker isn’t necessarily the best fit. We will find out why later.
Interactive Brokers Pro: 1.33%
Interactive Brokers Lite: 2.83%
M1 Plus: 2.25%
M1 Finance: 3.75%
The competition is fierce to attract as many investors as possible. Interactive Brokers, M1, and Robinhood offer similar rates as well as commission-free investing.
For those seeking Interactive Brokers, to be accepted for a margin account, a minimum balance of $100,000 is required. The platform may also be difficult to understand for unseasoned investors.
Brokers With Margin
M1 only required a $2,000 balance to begin trading and a more intuitive platform. However, M1 does not support options, futures, or more advanced investments. It is probably your best bet for margin stock purchases. As for Robinhood, it is a complete dumpster fire that I would stay away from.
I’m speaking about the stock and the platform. Too many controversies and red flags. Their platform crashes often, they are involved in numerous lawsuits and they royally messed up during the meme stocks/short squeeze early last year.
The company name is an ironic joke. Robinhood takes money from the rich and distributes it to the poor. Moving on. For those seeking everything under one platform, they will have to pay a higher interest rate as well as transaction fees.
Before choosing a platform, compare margin requirements, fees, and terms. You need to know how margin rates affect buying power so you make the best choice.
Earlier in the article, I quickly mentioned the term portfolio margin. Now, we will elaborate on its meaning. Once your portfolio balance reaches a certain amount, you unlock additional margin benefits. Some brokers demand as low as $125,000, while others need $250,000. Furthermore, not every broker offers portfolio margin features. Contact your broker for more info.
And now, the long-awaited benefits. First, brokers will extend double, triple, or even quadruple margin. It is case by case. Brokers will perform a complete analysis and patterns of trading.
Nothing is guaranteed beforehand. Second, risks are no longer limited to an individual stock level. If you have one poor trade among a dozen, a margin call won’t be initiated.
Instead, the risk covers the entirety of the portfolio. Wealthier and seasoned investors can hedge a position and hold on longer to losing trades. Lastly, interest rates become much more interesting. It pays to be wealthier.
To conclude, brokers extend funds to their clients in the form of an investment loan. Generally, it is double the amount held in the account. Clients can use these funds to purchase stocks or for personal use.
A minimum balance is required. Interest fees are also incurred. They depend on the account balance and the chosen broker. Once balances reach the 6-digit point, additional benefits are unlocked with some brokers.
In any case, margin trading requires a complete understanding of financial markets and higher risk tolerance. It is not for beginners.
If you want to learn more about how you can profit from the stock market, head on over to our free library of educational courses. We have something for everyone, including trading options for those with small accounts.