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Margin
With a margin account, you can borrow money from your brokerage account to purchase securities. The portion of the purchase price that you must deposit is called margin and is your initial equity or value in your account. The loan is secured by the securities you purchase. Buying on margin amounts to getting a loan. When you buy on margin, you must repay both the amount you borrowed and interest, even if you lose money on your investment.
Margin may be a useful tool in your investment strategy, but purchasing securities on margin involves significant risk and is not appropriate for everyone.
Margin Q&As
The following Q&As will address basic questions about the benefits and disadvantages of borrowing on margin. For more detailed information, read our margin rates and Margin Risk Disclosure Statement.
You may also wish to view the Purchasing on Margin section of the FINRA's Investor Education web site and the Margin information on the SEC's web site.
* To view these PDF files you will need Adobe Acrobat, which is available for downloading free of charge.
Q: What does it mean when I purchase securities on margin?
Q. What is a margin call?
Q: How do I know if a margin account is for me?
Q: What are the benefits of borrowing on margin?
Q: What are the risks involved with margin borrowing?
Q: How does margin borrowing work?
Q: Which securities are eligible as margin borrowing collateral?
Q: Which securities are not eligible?
Q: What does it mean when I purchase securities on margin?
A: A margin account allows you to increase your investment purchasing power by borrowing money. When you borrow on margin, you use the marketable securities in your account as collateral for a loan.
Q. What is a margin call?
A. If the securities in your account decline in value, so will the value of the collateral supporting your loan. If the value of your securities declines past a certain amount, we may issue a margin call to restore the value of your account. Whether or not we issue a margin call, we have the right to liquidate securities in your account in order to meet our equity requirements for customer margin accounts. We have the right to do this without contacting you first. If we do issue a margin call, we may give you a limited time to satisfy the call. If the market is unusually volatile, the amount of time you have to satisfy the call may be reduced from the amount of time we would normally allow.
Q: How do I know if a margin account is for me?
A: It is essential that you fully understand how a margin account works. Familiarize yourself with our margin policies and practices as described on this page and in Margin Rates. You can also call one of our Individual Consultants at 1 800 927-3059 if you have additional questions or concerns.
Unless you are completely comfortable borrowing on margin, you should consider limiting your purchases to a cash account that requires you to pay for the securities in full. Cash accounts are not subject to margin calls.
Q: What are the benefits of borrowing on margin?
A: Margin borrowing gives you leverage by allowing you to purchase additional securities using your existing assets as collateral for the loan. It allows you to respond to market changes and react quickly to new investment opportunities that may arise. In addition, you may be protected against late payments for trades. If we do not receive your payment for the purchase of securities, borrowing against the fully paid and marginable securities in your account may cover payment. And, margin interest rates may be comparable to, or lower than, the prime interest rate, the rate offered by banks to their best business customers. The actual interest rate charged will be determined by the value of cash and securities in your account. Finally, using a margin account lets you borrow without a preset repayment plan, unless there is a margin call. Interest on the outstanding balance is due and posted to your account monthly.
Q: What are the risks involved with margin borrowing?
A: There are a number of risks that you need to consider in deciding to trade securities on margin. These include:
- You may be forced to sell securities in your accounts to meet a margin call. If the equity in your account falls below the maintenance margin requirements under the law—or higher "house" requirements (if applicable), we can sell the securities in your accounts to cover the margin deficiency. You will also be responsible for any shortfall in the accounts after such a sale.
- Securities in your account can be sold without contacting you. Some investors mistakenly believe that they must be contacted first for a margin call to be valid. This is not the case. We will attempt to notify our customers of margin calls, but are not required to do so. Even if you're contacted and provided with a specific date to meet a margin call, we may decide to sell some or all of your securities before that date without any further notice to you. For example, we may take this action because the market value of your securities has continued to decline in value.
- You are not entitled to choose which securities or other assets in your accounts are sold. There is no provision in the margin rules that gives you the right to control liquidation decisions. We may decide to sell any of the securities that are collateral for your margin loan to protect our interests.
- The "house" maintenance requirements can increase at any time and without advance notice. These changes often take effect immediately and may cause a house call. If you don't satisfy this call, we may liquidate or sell securities in your accounts.
- You are not entitled to an extension of time on a margin call. While an extension of time to meet a margin call may be available to you under certain conditions, you do not have a right to the extension.
- You can lose more money than you deposit in a margin account. A decline in the value of the securities you purchased on margin may require you to provide additional money to your account to avoid the forced sale of those securities or other securities in your accounts.
Q: How does margin borrowing work?
A: The Federal Reserve sets the policies that govern borrowing on margin. You may obtain a loan for up to 50% of the market value of many stocks you may hold in your TIAA-CREF Brokerage Services account. For example, if you have $10,000 of fully paid marginable stocks in your account, you can borrow $5,000, or up to 50% of their value. Then you can use two times the amount that you borrowed ($5,000 x 2 = $10,000) to purchase additional marginable securities.
Q: Which securities are eligible as margin borrowing collateral?
A: All stocks trading for $5.00 or more listed on the New York Stock Exchange and other major U.S. exchanges, in addition to most NASDAQ-traded securities. Treasury, corporate, municipal, and government securities are eligible as well.
Q: Which securities are NOT eligible as margin borrowing collateral?
A: IPOs (not marginable for 30 days), mutual funds held less than 30 days, securities held in a retirement account, securities held in a custodial account, and CDs. Options have no loan value for margin purposes.
For additional information, please see:
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