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  • Writer's pictureMatt DeLong

What do the interest rates mentioned in margin trading mean?

Trading Margin is essentially a loan to buy more securities than you have capital for. Most brokers offer a 2x’s margin in a non-retirement account and charge “interest” on the additional capital at your disposal. So, if you have $50k in your non-retirement brokerage account and you have 2 times that number in BP (“buying power”), that means you can buy $100k of securities.

If you buy $100k in securities ($50k more than your equity), then the $50k of margin is a “loan” from your broker and the securities themselves are the collateral against that loan. The margin portion of your buying power has an interest rate on the balance of the $50k worth of borrowed money you are using.

NOTE: Using margin is a double edged sword. When things are going in your favor, they accelerate your profits, however, when they are moving against you — they accelerate your losses (double edged sword).

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