What Is a Reg-T Margin Loan?
- A margin loan is a loan against securities held in a brokerage account. The account must be designated by the broker as a margin account. A margin loan is initiated when an investor buys more stock than she has available cash in the account. For example, the investor has $20,000 cash in the account and submits a stock buy order for $30,000 worth of stock. The order will be filled and the investor will have $30,000 worth of stock in the account and a $10,000 margin loan on the account.
- As of May 2011, Reg T rules allow an investor to finance up to 50 percent of the cost of stock investments with a margin loan. To buy $20,000 worth of stock, the investor would pay at least $10,000 and be able to take a margin loan for the remaining $10,000. If the investor owns stock in the account and there is no margin loan outstanding, she could ask the broker to extend margin loan credit for up to half of the value of stocks in the account.
- A margin loan does not have to be repaid until the stocks supporting the loan are sold. The interest on the loan will accrue to the loan balance. The broker will require an investor to keep a minimum level of investor equity in the account. Reg T sets minimum equity at 25 percent, but an individual broker's minimum may be higher. The investor's equity is the value of the securities in the account minus the margin loan balance. Investor equity will decline if the stocks in the account fall in value.
- A margin loan can boost an investor's return on invested money. For example, $20,000 worth of stock is purchased with $10,000 investor equity and a $10,000 loan. The stock value goes up 10 percent to $22,000. The stock is sold, the $10,000 load paid off and the investor has $12,000 in equity. The result is a 20 percent gain for the investor on a 10 percent gain in the stock price. Falling stock prices have the same effect for losing money. With a 50 percent margin loan, a 50 percent drop in the stock price is a 100 percent loss to the investor.
