Is margin right for you?
Understanding and considering the benefits and risks associated with margin is important in determining whether margin is right for you.
The Risk vs Reward of Margin Trading
It's important to weigh the risks against the advantages of trading in a margin account, relative to a cash account. Let's take a look at some key considerations:
In a margin account, your positions will usually be more sensitive to day-to-day market fluctuations, and if there is a really sharp decline, you could end up losing more than the total value of your account.
Additionally, you're always required to maintain a minimum level of equity in a margin account; usually about 30% to 35% for most stocks.
If your securities should start to decline in value, and fall below this level, you'll be required to deposit additional money into your account. If you're either unable or unwilling to do this, your broker can close out the securities in your account to increase your equity. Unfortunately when this happens, it could be at the worst possible time and at the worst possible price.
And the risks don't end there. If your positions lose value too quickly and your margin loan balance exceeds the proceeds from the securities your broker closed out, you could end up with no securities at all, but still owing money.
On the up side, when you trade in a margin account, you can typically borrow 50% of the cost of any new securities. That means you can buy up to twice as many shares as in a cash account, and this might let you take advantage of short-term market opportunities without selling any of your existing positions.
It can also make it easier to diversify your portfolio if you are overly concentrated but you don't want to sell any of your holdings.
When you trade in a cash account, your potential loss is limited to the amount you've invested, and since you own your securities outright, you get to decide when, or if, to sell them. And you won't be forced to sell them during unfavorable market conditions due to a margin call.
But if you only trade in a cash account, and the stock you buy goes up, your profits will usually be less than if you traded in a margin account and bought more shares.
Always remember that this is a loan and you will incur interest charges. Whether your trades end up being profitable or not, eventually you will have to pay back the loan, plus margin interest charges.
There is no set repayment schedule on a margin loan. Instead, when 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.
Trading on margin can increase your gains if you make good investing decisions, but it can also increase your losses when you don't.
If you feel like margin trading might be right for you, it's easy to get started. When you open an investing account with a broker, unless it's an IRA or some other type of retirement account, you'll usually be offered the opportunity to apply for a margin account.
While it's typically never a good idea to use all of your available margin, leverage can give you the flexibility to take advantage of investing opportunities, that might not be possible in a cash account.
Margin can be an advantageous tool.
- Leverage the assets in your portfolio to own more securities than you could with cash alone, thereby increasing your potential return.
- Quick access to funds without Tooltip your current assets to potentially take advantage of timely market opportunities.
- Provides a ready source of credit with repayment flexibility that can be used for personal financial needs, including emergency expenses, debt consolidation, tuition, taxes, smoothing cash flow, or home repairs.
- Increase your ability to Tooltip and profit from stock declines.
- You only need $2,000 worth of eligible securities to start borrowing on margin once your account is margin enabled.1
Important risks of margin.
- Tooltip , increases when there are significant downward price fluctuations to securities in your account. Stay connected and actively manage your account.
- Leveraging exposes you to greater downside risk than cash purchases because you must repay your margin loan, regardless of the underlying value of the securities you purchased.
- Schwab can change its Tooltip at any time without prior notice.
- If the Tooltip in your account falls below the minimum maintenance requirements (30% for most securities), you'll have to deposit additional cash or acceptable Tooltip .
- If you fail to meet your minimums, Schwab may be forced to sell some or all of your securities, with or without your prior approval.
- Interest accrues at current market rates, which could increase (or decrease) during the time you have an outstanding loan.
Tips for managing margin risk.
Always have a plan
Develop a risk management strategy for your margin-based investments that is consistent with your market outlook and stick to it.
Create contingency plans for dealing with potential margin calls and have a repayment plan ready if the market turns against you, if margin maintenance requirements rise, or if margin interest rates rise.
Don't be fully leveragedBorrow less than the maximum amount allowable in your account. Set a personal borrowing level for yourself that is higher than Schwab's requirements and actively monitor your portfolio to ensure you are not going below that equity level. If your investment strategy does involve being fully leveraged, be sure to watch carefully for Tooltip .
Borrow against a diversified portfolio
This reduces the risk that a single security's drop in value will trigger a Tooltip .
Closely watch your portfolio
Be aware of what is going on in the market. Recognize that margin does bring increased risk, and consistently reassess your risk tolerance. Anticipate a potential decline in value, especially during uncertain market conditions.
Why trade margin with Schwab?
Access educational resources to learn more about margin and how it might fit into your investing strategy.
Our competitive margin interest rates can make margin borrowing more cost-effective than other lending options like personal or unsecured loans.
Flexible payment schedule
There is no set repayment schedule as long as you maintain the required level of in your account.
All in one place
As a Schwab client, you can manage your margin loan alongside your investments and other finances in a single, convenient location.
Get started with margin in three simple steps.
StepApply for margin
Log in and from Profile > click Margin & Options to "Apply for margin."
StepTap into available funds
Once approved, you can tap into your available funds at any time by placing a trade, writing a Schwab One® check, placing a wire transfer, requesting a check, or using your Schwab One Visa® Platinum debit card. No additional forms or applications are required.
Ready to start investing?
Ready to start investing?
Open a Schwab One Brokerage account and apply to add margin.
Already a Schwab client?
Log in and find out if your account is enabled for margin.
Questions? We're ready to help.