How Margin Works

Borrowing money to buy more stock

Your $10,000=Broker lends $10,000$20,000 buying power (2x leverage)

Reg T requirement

50%

initial margin

Maintenance margin

25%

minimum equity

Schwab margin rate

~10%/yr

you pay interest

Stock goes up 20%

$20k becomes $24k

You owe $10k to broker

Your equity: $14k

Your return: 40% (2x the gain)

Stock goes down 20%

$20k becomes $16k

You still owe $10k to broker

Your equity: $6k

Your loss: 40% (2x the loss)

the cost

Margin isn't free. At ~10%/yr interest, holding $10k in margin for a year costs you $1,000 just in interest. Your gains need to beat that first.

Check yourself

You invest $10k of your money plus $10k on margin. The stock drops 50%. How much of YOUR money is left?

← Spreads