Points to know
- Margin investing can offer benefits such as more buying power.
- Not all securities can be traded on margin.
- Margin investing can protect against trading violations in your account.
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See what you can do with margin investing
If margin investing is right for you, you'll find it has several benefits.
5 minute read
Why trade on margin
You'll have more buying power
Margin investing allows you to have more assets available in your account to buy marginable securities.
Your buying power consists of your money available to trade in your account, plus the amount that can be borrowed against securities held in your margin account.
Here's an example of how you have a greater potential for gain:
You buy shares of ABC stock for $100,000 using $50,000 from your settlement fund and a margin loan for $50,000. You sell the stock for $125,000. You pocket $25,000, a 50% net gain.
If you had paid in full for the stock, you would have received $25,000 on a $100,000 cash outlay, a 25% net gain.
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Margin investing
The borrowing of either cash or securities from a broker to complete investment transactions. You're usually required to come up with just a percentage of the amount needed, while paying interest to finance the rest based on an approved line of credit.
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Marginable security
A security that meets the Federal Reserve requirements for being bought and sold in a margin account.
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Funds/Money available to trade
The amount of money available to purchase securities in your brokerage account. It includes your money market settlement fund balance, pending credits or debits, and margin cash available (if approved for margin).
The figure is adjusted for open orders to purchase stocks or ETFs at the market or to purchase Vanguard mutual funds or mutual funds from other companies. Money recently added to your account by check or electronic bank transfer may not be available to purchase certain securities or to withdraw from the account.
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Margin account
A brokerage account that allows you to borrow a percentage of a security's value from the broker to purchase that security. If the value of the stock drops substantially, you're required to deposit more cash in the account or sell a portion of the stock.
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Settlement fund
This holds the money you use to buy securities, as well as the proceeds whenever you sell.
You'll have access to ongoing credit
Margin loans are a ready source of credit and don't require the approval or credit checks that a bank may ask for. There's also no set repayment schedule as long as you maintain the required equity in the account.
For short-term cash flow needs, taking a margin loan and paying interest is a convenient alternative to liquidating a portion of your portfolio, locking in capital gains, and being subject to taxes on those gains. You will, however, be paying interest to Vanguard Brokerage for the duration of the loan.
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Equity
In a margin account, the value of your securities minus the amount you've borrowed from your brokerage firm.
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Interest rate
The amount or rate you pay when you borrow money.
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Capital gain/loss
The difference between the sale price of an asset (such as a mutual fund, stock, or bond) and the original cost of the asset. A capital gain/loss is "unrealized" until the investment is sold, when it becomes a realized gain/loss. Realized gains are taxable and they may be considered short-term (if the investment was owned one year or less) or long-term (if the investment was owned for more than one year).
You'll borrow at competitive margin rates
Margin borrowing is generally more cost-effective than other lending options, such as credit cards or a bank loan.
You may be able to get a tax deduction
Consult your tax advisor to see if interest on your margin loan is deductible.
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Freeriding
Buying and selling securities in a cash account without covering the initial purchase.
You'll be less likely to incur a trading violation
Trading violations, such as freeriding, are less likely to occur in a margin account. You'll realize this benefit even if you never actually borrow money from Vanguard Brokerage.
KEEP IN MIND
Did you know that you're fully liable for the funds you've borrowed in your margin account? Our risk disclosure statement details what else you should know before you trade on margin.
What you can trade on margin
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:
- Exchange-listed stocks and bonds.
- Stocks that meet Nasdaq and National Market System trading criteria.
- Certain over-the-counter (OTC) securities approved by the FRB.
- Warrants (for listed and designated securities only).
- Mutual funds and Vanguard ETFs® 30 days after purchase.
Securities that aren't marginable (but can still be traded) include:
- Call and put options.
- Common and preferred OTC stocks not approved by the FRB.
- Rights.
- Insurance contracts.
- New issues (initial public offerings for the first 30 calendar days).
In addition, we can use our discretion in prohibiting margin investing for a particular security.
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Stock
An investment that represents part ownership in a corporation. Each share of stock is a proportional stake in the corporation's assets and profits.
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Bond
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.
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Nasdaq
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.
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National Market 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).
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Warrant
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.
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Call & put options
The right to either buy (call option) a specific security at an agreed-upon price or sell (put option) a specific security at an agreed-upon price sometime in the future.
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Common stock
A security that represents ownership in a corporation. Holders exercise control by electing a board of directors and voting on corporate policy. In the event of a company's liquidation, common stockholders have lowest priority and receive assets only after bondholders, preferred stockholders, and other debt holders have been paid in full.
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Preferred stock (security)
A security that takes precedence over common stock when a company pays dividends or liquidates assets. Preferred securities do not usually carry voting rights.
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Rights
An offer given to current shareholders allowing the purchase of additional shares or securities before it's offered to the public. This allows existing shareholders to retain a proportional interest in the company.
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Over-the-counter (OTC) security
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.
Pink Sheets
A daily publication of the National Quotation Bureau giving the bid and ask prices of OTC stocks not listed on the Nasdaq.
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Initial public offering (IPO)
A corporation's first offering of common stock to the public.
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For additional information about margin investing, including the risks involved, read the Vanguard Brokerage Initial Margin Risk Disclosure Statement or visit the FINRA and U.S. Securities and Exchange Commission websites.
All investing is subject to risk, including the possible loss of the money you invest.
Vanguard's advice services are provided by Vanguard Advisers, Inc. ("VAI"), a registered investment advisor, or by Vanguard National Trust Company ("VNTC"), a federally chartered, limited-purpose trust company.
The services provided to clients will vary based upon the service selected, including management, fees, eligibility, and access to an advisor. Find VAI's Form CRS and each program's advisory brochure here for an overview.
VAI and VNTC are subsidiaries of The Vanguard Group, Inc., and affiliates of Vanguard Marketing Corporation. Neither VAI, VNTC, nor its affiliates guarantee profits or protection from losses.