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Margin Lending Definition

Margin lending is the practice of borrowing money from a brokerage account while leveraging investment assets as collateral for the loan.

Is Margin Lending a Good Idea?

Margin borrowing is neither “good” nor “bad”, but rather a strategy that is better suited for some investors over others. Ideal candidates are those who have more substantial assets to use as collateral and those who wish to solve liquidity issues. 

There are several potential uses for margin lending, including as a “bridge loan” (a short-term loan used to cover cash flow needs), as a loan to pay down another higher interest rate loan like student debt, as a solution to short-term credit needs, or as leverage to purchase additional securities.  

What are The Risks of Margin Lending?

Like any investment strategy, margin lending carries both potential benefits and risks. Since margin rates can fluctuate, it is not typically advised for investors to use margin as a long-term financial planning solution. Additionally, the more money that is borrowed, the closer an investor gets to their minimum margin maintenance rate, meaning the loan becomes riskier since market volatility can cause a “margin call” in which investors are forced to sell securities or obtain more cash to secure the balance. 

Overall, there are several considerations investors should be aware of before using margin lending, but it is one of the many tools that can be a useful strategy in a comprehensive financial plan. 

Wealthspire Advisors is a registered investment adviser and subsidiary company of NFP Corp.
This information should not be construed as a recommendation, offer to sell, or solicitation of an offer to buy a particular security or investment strategy. The commentary provided is for informational purposes only and should not be relied upon for accounting, legal, or tax advice. While the information is deemed reliable, Wealthspire Advisors cannot guarantee its accuracy, completeness, or suitability for any purpose, and makes no warranties with regard to the results to be obtained from its use. ©2021 Wealthspire Advisors

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