Margin Lending

WHAT IS MARGIN?

Did you know you can get a line of credit on your investments?

Margin lending is a personal loan that is collateralized by the securities within your investment portfolio. Typically, margin lending is tied to a variable rate structure and offers flexibility with a favorable rate structure in comparison to other borrowing sources. The money borrowed can be used to purchase securities or for a variety of personal financial needs, from debt consolidation or refinancing existing debt, to paying for higher education or luxury purchases.

HOW DOES MARGIN WORK?

The amount you can borrow on margin is dependent on the type and value of securities in your current portfolio. To purchase securities, the amount is usually limited to 50% of the value of your marginable securities. You must maintain equity in your portfolio of at least 25% of the total account value, depending on the eligible securities you hold. In the event the equity in your portfolio falls below the minimum maintenance requirement, you would be required to deposit additional cash or collateral. If you cannot meet your minimum, you could be subject to a margin call and we may have to sell securities from your portfolio, with or without your prior approval. Before borrowing on margin, be sure to discuss the risks associated with margin loans and have risk mitigation strategies in place with the Capital CS Group.

Margin loans can be used to purchase securities, or for a wide range of personal financial needs, including short-term borrowing and cash-flow needs:

– Increase buying power and capitalize on potential market opportunities by leveraging investments – Defer taxes on capital gains from selling securities – Refinance or consolidate existing debt – Pay off high rate mortgages – Buy additional properties – Pay for Higher Education – Business Startup – The possibilities are endless

Although margin lending isn’t for everyone, as it presents unique risks, it can provide flexibility and an effective method of working towards your financial goals.

REQUIREMENTS FOR MARGIN LENDING

The amount you can borrow on margin toward the purchase of securities is typically limited to 50% of the value of marginable securities in your account (subject to eligible securities) but can increase for certain positions. Although, it is prudent to borrow less to minimize risk. [Federal Reserve Board Regulation T allows brokerage firms to lend clients up to 50% of the total purchase price of a stock.]

Our custodian TD Ameritrade further requires that the equity in an account be at least 30% of the current market value of the security (subject to certain restrictions). To begin borrowing, you must have cash or marginable securities in your account with us and be fully aware of the risks associated with margin.

Once you establish your margin line, you are required to maintain a certain amount of equity within your account, depending on the securities held. Typically, the collateral requirement is at least 30% of the total account value, but it can be higher for certain securities or accounts.

EXAMPLE OF TRADING ON MARGIN

You have an individual brokerage account consisting of margin eligible equities and fixed income securities with a total value of $275,000. You applied and got approved for using margin.

Based on a review of your account holdings, you’re initially eligible to borrow up to 50% of your total account value of $275,000 which is $137,500. You decide to take a $50,000 loan which will have an effective rate of 1.600% (based on margin interest rates as of March 15, 2020). This loan value is much lower than your maximum allowable amount, but one you’re comfortable with.

WHAT ARE THE BENEFITS AND RISKS OF MARGIN LENDING?

Margin lending offers convenient access to funds, ease of transaction and lower rates then other conventional forms of borrowing. Margin loans have repayment flexibility, which allows you to payback your loan on your own terms as long as you maintain required equity in your portfolio. Interest that accrues in the account may be offset against taxable income, consult your CPA. Margin loans are privatized personal collateral loans and will not appear on your credit report and do not require any credit inquiries.

Margin loans are not right for every investor. Because margin magnifies both profits and losses, it’s possible to lose more than the initial amount used to purchase investments. This magnifying effect can lead to a “margin call,” when losses exceed a limit set either by a broker or the broker’s regulating body. This “maintenance” margin limit may be increased by the broker without prior notice, but often ranges from 30% to 40%, instead of the initial 50% required at the time of purchase.

OUR SETUP PROCESS

We first ensure any client who is interested in utilizing margin fully understands to benefits, as well as, the risks associated with utilizing margin. Then our team guides our clients through the new accounts establishment process and paperwork which includes:

– Account Application – Margin Lending Agreement – Money Movement Form – Transfer Form (if transferring an existing investment account)

Account is funded by transferring in existing outside investment account or depositing funds. Processing time is usually 3-5 business days.

Once account is fully funded, we can either begin margin trading or send funds out via electronically funds transfer (EFT) , Fed Fundwire transfer, or check.

Margin Borrowing is for Sophisticated investors with high risk tolerance. There are risks associated with using your assets as collateral for a margin loan. You may lose more than your limited investment. Please read and understand the Margin Disclosure Document, Margin Handbook, Margin Requirements, and the Margin Agreement Loan Consent from your account’s custodian before proceeding. Sufficient collateral must be maintained and you may need to deposit additional securities on short notice. Some or all of your securities may be sold without prior notice in order to maintain account equity at required maintenance levels. You may not be able to determine what securities are sold and this may cause adverse tax consequences and interrupt your long-term investment strategies. Your collateral maintenance requirements can be increased at any time without notice. The Annual Percentage Rate (APR) in USD margin loan balances is based on loan balances as of the time of distribution of information and is subject to change without prior notice. The Base Loan Rate before spread is closely tied to Fed Funds Rate but may not follow Fed Funds rates exactly and is subject to change without prior notice. For additional up to date information on margin loan rates please contact Capital CS Group directly.