Stock Accounts With Margin Loans
SEC rules allow stock brokers to loan money to investors to pay for a portion of the cost of stocks. This type of loan is called a margin loan. To qualify for margin loans you just have to apply for a margin account with a stock broker and fund the account with some cash or equity. The SEC minimum equity for margin account is $2,000 but individual brokerage firms can set higher minimums.
A margin account allows you to borrow up to 50 percent of the cost to buy stock. If you have $3,000 cash in your account, you could purchase up to $6,000 worth of stock. You obtain a margin loan automatically when you buy stock in your margin account for more than the cash available in the account. A margin loan does not have to be repaid until you sell the stock. However, a margin account has a minimum maintenance requirement you should be aware of. The minimum maintenance is 25 percent equity in the account. If an investor's equity in a margin account falls below the 25 percent level, the investor would be required to deposit more cash or sell some stocks to reduce the loan amount.
For example, you have $4,000 in your margin account and buy $8,000 worth of stock, borrowing $4,000 as a margin loan. If the value of the stock declines to $6,000, the margin loan is still $4,000, so your equity in the account would be $2,000. The $2,000 equity divided by the $6,000 account value results in an equity level of 33 percent, so the account is above the maintenance margin requirement and the account still has the minimum equity requirement of $2,000. If the stocks declined further, you would be required to add additional cash to the account.