Investing on margin
When you invest on margin, you borrow either cash or securities from your broker to complete investment transactions.
What's required for margin accounts
You're usually required to come up with just a percentage of the amount needed for a securities purchase or short sale while paying interest to finance the rest based on an approved line of credit.
This allows you to increase your "buying power"—the amount of money available in your account to purchase marginable securities. For example, if you have $50,000 in your money market settlement fund, your buying power is actually $100,000, because you're required to deposit just 50% when buying or selling short* most marginable securities.
To keep your line of credit open, you must maintain a certain amount of equity—the current value of your assets less the amount of the margin loan—in your account at all times. Margin trading can increase your return on an investment, but there's also the potential for significant loss. At Vanguard Brokerage, margin investing is allowed only with our prior approval for nonretirement brokerage accounts. It's not permitted for retirement accounts, UGMA/UTMA accounts, and certain other types of accounts.
You can't just trade any type of security you want on margin. The Federal Reserve Board (FRB) determines which securities can be margined. These include:
Vanguard Brokerage margin rate interest schedule
When money is borrowed in a margin account, interest will be calculated on a daily basis and charged based on the total debit (borrowed) balance. The monthly interest period begins two business days before the beginning of each month and ends three business days before the following month's end.
As of November 1st, 2019, Vanguard Brokerage's base lending rate and interest rates are as shown below. The effective rate, or true interest rate, charged on loan balances is the base lending rate plus the interest rate. If the rate of interest charged to you increases for any reason other than a change in the base lending rate, you will be notified at least 30 days in advance.
Current interest rate schedule
Up to $19,999
$1 million or more
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An investment that represents part ownership in a corporation. Each share of stock is a proportional stake in the corporation's assets and profits.
A loan made to a corporation or government in exchange for regular interest payments. The bond issuer agrees to pay back the loan by a specific date. Bonds can be traded on the secondary market.
A computerized system that provides up-to-the-minute price quotations for securities traded over-the-counter, as well as for many securities listed on the New York Stock Exchange. It stands for National Association of Securities Dealers Automated Quotation System.
A system that facilitates trades of over-the-counter stocks meeting specific criteria and requires all exchanges to post prices simultaneously. It is sponsored by FINRA (Financial Industry Regulatory Authority) and Nasdaq (National Association of Securities Dealers Automated Quotations).
A security that isn't listed and traded on an organized exchange. Many OTC stocks trade through:
The OTC Bulletin Board
An electronic quotation service showing real-time quotes, last-sale prices, and volume information for OTC stocks not listed on the Nasdaq.
A daily publication of the National Quotation Bureau giving the bid and ask prices of OTC stocks not listed on the Nasdaq.
An offer to purchase a certain amount of common stock at a set price (usually higher than the current price) during an extended period of time. The holder can exercise the warrant, transfer it, or trade it.