Money Rehab with Nicole Lapin
How Margin Borrowing Can Supercharge or Destroy Your Investments
Tue, 01 Apr 2025
With margin borrowing, you can give your investments a boost— but if you're not careful, you could also lose more than you gain. Nicole explains the concept, and whether it's a money move you should make.
Chapter 1: Why is Nicole talking about Airbnb in a finance podcast?
So I have written, count them, five books now. But each time I'm in the writing process, I stay at an Airbnb. I love to stay at an Airbnb. When I was actually first launching this show, I was at an Airbnb in Arizona. It was so peaceful. It was stunning. I could be productive and comfortable. The Airbnb was also surrounded by a ton of javelinas.
If you know Arizona, you know they're like wild pig creatures. But honestly, I love them too. Being away for work, for fun, or both is a perfect opportunity to host your space on Airbnb. And if you think that hosting is overwhelming, I have a solve for you. With Airbnb's co-host network, it's easier than ever before to host. It's also a great way to earn some extra cash, which I know we all love.
Now you can hire a quality local co-host to take care of your home and your guests. They can do everything from creating your listing to managing reservations to messaging guests and even providing on-site support. So if you've got a secondary property or an extended trip coming up and you need a little help hosting while you're away, you can hire a co-host to do the work for you.
Find a co-host at airbnb.com slash host. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. Well, if you've been on your money rehab game for a while now, you know that making smart investments can grow your money year over year. And you don't need a lot of money to start investing.
Chapter 2: What is margin borrowing?
But because whatever you invest compounds, the more money you invest, the better. That's where margin borrowing comes in. Margin borrowing is a money move that can give your brokerage account a financial boost, but it's not as picture perfect as it seems. So what exactly is margin borrowing to begin with?
You can think of it as your brokerages way of saying, hey, you've got some amazing investment ideas. I can lend you some cash to make those happen. At a top level, you're borrowing money to buy stocks and putting the stocks that you already own up as collateral.
Chapter 3: How does margin borrowing work in practice?
So if you've got your eye on 10K worth of stock, but you only have five grand on hand, margin lets you borrow the rest to make the full purchase. It's like getting a bigger shovel to scoop up more of the market. It sounds a little weird to put your investments up as collateral, but it's no different than using your house as collateral for a loan or paying a security deposit on a hotel reservation.
You're offering an asset as a guarantee to a lender in the context of margin borrowing. It means that you're borrowing money from the brokerage and using your existing stocks or other eligible securities, depending on what you're investing in as collateral. So your brokerage kind of becomes like the guy behind the counter at the pawn shop.
But instead of your jewelry, you're using your stock holdings to secure a loan. You tell the broker, hold on to these shares for me. I promise to repay you when I borrow. But if I can't, these shares are all yours to sell to recover your money. You're essentially agreeing to let the broker use your current investments as a safety net.
And by doing that, you're reassuring the brokerage that it won't be left in a lurch if things go south. This is a new way to think about your brokerage that is totally legit. Your brokerage isn't just the home of your investments. Your brokerage can also lend you money. Just like your bank might lend you money to buy a house, your brokerage lends you money to buy securities.
Chapter 4: What are the risks associated with margin borrowing?
This service allows you to amplify your purchasing power in the stock market. Of course, this kind of lending isn't a free for all. You enter into a margin agreement when you set up a margin account. This agreement outlines what you can do, the interest rate on your borrowed funds and the brokerages terms for potentially selling your securities collateral if you can't meet a margin call.
A margin call happens if the value of your collateral, the securities that you bought plus any others in your margin account, drops below a certain point. The brokerage will ask you to deposit more money or to sell some of your securities to balance out what you owe. This is the brokerage's way of ensuring that the loan remains secured. More mathiness in just a sec.
But first, I should mention your brokerage also isn't just going to give you money for funsies. It's a loan, which pretty much always means interest payments. The interest rate on margin borrowing for investments can vary depending on a whole mess of factors, like which brokerage firm you use, the amount you want to borrow, the market conditions.
Chapter 5: How do interest rates affect margin borrowing?
Generally, the interest rates on margin loans are calculated based on a broker's base rate plus a certain percentage that can increase as the amount of borrowed money goes up. That all translates to rates landing between below 2% to over 9%. For larger brokerages, you might see lower rates due to the ability to lend at more competitive terms.
It is really important, though, for you to check specific rates offered by your brokerage, as these often change based on shifts in the broader financial landscape, like changes to the Federal Reserve's interest rates, which, by the way, just kept steady this week. Hey, yo. So playing on margin comes with some perks.
It supercharges your buying power and allows you to snatch up more shares than cash alone could grab. And that gives you a bigger shot at bigger returns. By doing all that, you're maximizing your investment opportunities. If you see a stock or a fund that you think is a great opportunity but you're short on cash, margin has your back.
And that enables you to act quickly and to snag those shares before the opportunity disappears. And you get ultimate flexibility with margin. You don't need to wait for the funds to clear like you would depositing cash from a bank. And you don't need to sell assets to wait for that transaction to post. You can get up and running pretty quickly with margin.
and now that we've covered that face let's talk about the risks because they are significant just like margin can amplify gains it can also magnify losses too a dip in stock prices might just be oh whatever in regular scenarios we know that right the stock market goes up the stock market goes down that's kind of its thing but a dip in stock prices when you're borrowing money that's
not a oh whatever, that's more of a oh you know what. And then there's the dreaded margin call I alluded to earlier. This is definitely the worst case scenario of margin borrowing. If your investments dip below a certain value, your brokerage will call your debt asking you to add more cash or securities into your account pronto.
If you can't meet a margin call, they might just sell your stocks to cover it, potentially causing you to cash out at the worst time. And brokerages typically have a hard and fast rule around how low your investments need to dip before they can issue a margin call. Typically, they require 30% for what's called a maintenance requirement.
But this concept is a little easier to follow with a number trail. So let's use your 10K investment again as an example. Say your brokerage requires that 30% maintenance requirement. You put in 5K plus another 5K from your brokerage as a margin loan. So your brokerage has 50% equity in that investment, right? Half of your investment is theirs until you pay it back.
If whatever you invested in drops and your 10K is now worth only 6K, the investor equity has also dropped to 1K or the 6K value minus the 5K loan or just 17% of your total investment. But your brokerage has that hard and fast rule that they need to have at least 30 percent equity in your investment. So this drop would trigger a margin call.
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