What To Know About Margins

Investing On Margin

By: Brian Ruiz

What is Margin?

What does it mean when you hear about investing on Margins? Investing on Margins means you borrow from your brokerage account to purchase a stock or option calls. Margins refers to the amount of equity you as an investor have in your brokerage account to be able to buy on margin. Making the difference between the total value of your investment held in your investment account. For example if you have invested in your investment account a total of $3,000 then the brokerage firm will let you borrow an amount close to your actual investment for you to purchase more stocks of your choice. It will also use your invested capital as collateral, until you repay back the amount borrowed. Many will ask why would I borrow money to purchase a stock or option call? If you'll have to pay interest on the money borrowed. There are many way you can take advantage on investing in margin. 

Robinhood has become one of the most popular brokerage account since they launched. The easy to use interface allows even the inexpert investor to learn how to invest. The company believes on commission free stock trading that has gained the popularity for new investors to come into the market. In 2020 during the pandemic lockdown Robinhood saw a massive increase of new investors coming into to the market. They reported that more than 10 million new investors have downloaded their app and started to invest on their platform. Robinhood allows you to also invest on margin, after you meet their investment criteria. Robinhood has what they call Robinhood gold, its a $5 subscription that allows you to have better analytical views of the companies stock you might be interested in. With this they also let you borrow money up to $1,000 with no additional interest, but if you decide to borrow more than that they will charge you a 2.5% interest on the money borrowed above $1,000. 

The benefit of investing on margins are limitless allowing you to borrow money from your brokerage firm to buy on a specific stock at a specific price. For example, Apple stocks are trading around $130 and lets say they come down to $115 and this is a price you are interested on purchasing. But you don't have enough liquidity available to buy the stock. That's when margins comes in allowing you to borrow the necessary amount to buy the specific amount of stock. Another way margins are used are for short-term investments like option calls. An option call is when a buyer has the right, but not the obligation to purchase the stock option. Call options have expiration dates where the contract has to be executed, but the buyer has the option to sell the call option before the expiration date. The money you borrow on margin does not have an expiration date. Meaning that you can keep the loan for as long as you want, as long you keep paying the interest on the loan and follow all requirements. 

Trading on margin can also have a downside. When you decide to borrow money from your brokerage account there's two things to keep in mind which is the amount of interest and the possibility that your investment doesn't perform as expected. Before investing on margin make sure it makes sense and measure your risk vs. reward as margins are typically used for short-term investment like option calls. 


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