Many people wonder what is margin. Margin is simply funds borrowed and used to invest in securities in a brokerage account. Brokerage firms offer margin trading for investors and the margin rates depend on several factors. For easy math and understanding, let’s use an example of a brokerage firm offering 50% Margin.
You want to trade stocks and invest a total of $10,000. You deposit $5,000 and the brokerage firm provides you with another $5,000. This is 50% Margin. You put in 50% of the funds you want to invest and the broker is willing to provide the remaining 50% of your investment capital.
This is good because you do not have to come up with all of the funds, however, using margin can be dangerous because margin is a loan and loans generally charge interest. Automatically, you have to start paying interest as soon as you dip into the marginal section of your portfolio. Additionally, even though you only invested $5,000, your portfolio’s actual investment is $10,000. So if your portfolio value goes completely south, then you owe your broker $5,000, plus interest of course.
Brokerages charge you interest for borrowing these funds – just like any bank would. At Wall Street Survivor, the interest rate for your fantasy margin portfolio is 8 percent.