Margin Loans from Schwab

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Margin lending from Schwab is a flexible line of credit that allows you to borrow against the securities you already hold in your brokerage account.

When used correctly, margin loans can help you execute investment strategies by increasing your borrowing power to purchase more securities. It can also serve as a source of flexible borrowing for other short-term financial needs.

Schwab offers competitive rates and a flexible repayment schedule.

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Margin Trading: The Ins and Outs

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When you buy on margin, you're using the securities in your portfolio as collateral for a loan from your broker that you can use to buy more securities. You might use margin to take advantage of a unique opportunity when you don’t have enough cash on hand or you don’t want to sell any of the securities you already own to cover the cost.

You can generally borrow up to 50% of the costs of the securities you are buying with the funds from the margin account.  This will allow you to purchase twice as much as you could with just cash. In other words, you pay for half of the cost and you borrow the other half from your broker.

Let’s work through an example.

As you are doing your research, you find a stock that you think has upside profit potential. It’s trading for $100 a share, and you have $10,000 to invest, you could buy 100 shares. But you’d like to buy more than that. If you buy on margin, you can invest twice as much and buy 200 shares (200 x $100 = $20,000). 

Assuming your careful research turned out to be right and the stock goes up 25%; your 200 shares would be worth $25,000. If you decide to sell at this price, the $10,000 loan from your broker will automatically be repaid and you will be left with a $5,000 profit, instead of just $2500.While the stock only went up 25%, you realized a 50% profit by using margin.

But what if your stock declines in price by 25%? Then, your 200 shares would be worth only $15,000. If you choose to sell at this price, the $10,000 loan from your broker will be repaid automatically, and you will be left with a $5000 loss. While the stock only declined by 25%, you realized a 50% loss, and by using margin, you lost $5000 instead of only $2500. 

Additionally, just like with any other loan, you will have to pay interest on the loan, and that will either decrease your profit or increase your loss. Unlike most loans you may be familiar with, a margin loan does not have a set repayment schedule. Instead, the loan is paid in full when the securities are sold.

However, when you use margin to buy stock, the margin interest is often tax-deductible against your capital gains and investment income. 

Margin trading has unique risks. In order to decide if it is right for you, it is important understand these risks, as well as your personal risk tolerance.

If you want to learn more, check out the next video on the risks of margin trading.

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Margin borrowing is not appropriate for every investor. Make sure you understand the benefits and risks.

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How do margin loans work?

Margin lending can increase your profits as well as your losses, so it is important to determine how and if it fits into your investment strategy. Margin accounts also require a higher level of attention, including potentially monitoring stock prices on a daily basis. To better understand, let's take a look at a hypothetical example showing both gain and loss scenarios, with and without margin lending. (For simplicity, we've excluded trading fees and taxes.)

Margin and loss tables

  • A gain with margin

    You pay cash for 100 shares of a $50 stock. -$5,000
    You buy 100 more shares on margin.   $0
    Your stock rises to $70, and you sell 200 shares. +$14,000
    You repay your margin loan. -$5,000
    You pay margin interest.* -$400
    Your gain
    $3,600
  • A loss with margin

    You pay cash for 100 shares of a $50 stock. -$5,000
    You buy another 100 shares on margin.  $0
    Your stock falls to $30, and then you sell 200 shares.  $6,000
    You repay your margin loan. -$5,000
    You pay margin interest.* -$400
    Your loss -$4,400

A gain without a margin/ a loss without a margin tables

  • A gain without a margin

    You pay cash for 100 shares of a $50 stock. -$5,000
    Your stock rises to $70, and you sell 100 shares.  $7,000
    Your gain  $2,000
  • A loss without margin

    You pay cash for 100 shares of a $50 stock. -$5,000
    Your stock falls to $30, and you sell 100 shares.  $3,000
    Your loss -$2,000

Disclosure information

*Example uses a hypothetical, simple interest rate calculation at a rate of 8.00%. Actual interest would be higher due to daily compounding that is charged monthly to the account. The example assumes the loan amount remains constant and is outstanding for 12 months. Commissions, where applicable, and taxes have not been included in these illustrations but affect final outcomes and should always be considered.

How can I start using my margin loan?

Once your Schwab brokerage account is approved for margin use, you can tap into your available funds simply by:

  • Placing a trade

  • Writing a Schwab One® check

  • Placing a wire transfer

  • Requesting a check

  • Using your Schwab One Visa® Platinum debit card

Your interest rate depends on your balance and Schwab’s base rate. Interest accrues daily and is posted monthly.

Before you begin using margin, you should read Schwab's Margin Borrowing Overview and Disclosure Statement.

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