Brokerage Margin Loans
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Brokerage (Margin) Loans
If you hold stocks or bonds, you can borrow against them and use the money either to buy more securities, or for any purpose you choose. Interest rates on margin loans are usually a couple of points above the prime rate. For stocks, you can borrow as much as 50 percent of the market value of the security. That percentage is mandated by law, so if the value of your securities drop, your broker will demand repayment of any amount that would put you over the 50 percent limit.
Say, for example, you have stock worth $10,000 and you borrow against 50 percent of its value, or $5,000. If the value of your stock drops to $2,000, you will have to pay back $4,000 immediately, since $1,000 is the most you can borrow against $2,000 worth of stock. Margin loans are tricky and should really be used only by experienced investors.
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