Upbeat music plays throughout.
Narrator: Trading on margin, which is when you borrow funds from Schwab to buy securities, and use the purchased stock as collateral, can be a great way to increase the buying power in your account. Though, of course, there's risk involved, and you should be aware that the funds you borrow from Schwab are subject to being charged interest.
Eligible brokerage accounts at Schwab with at least $2,000 in cash or marginable securities can trade on margin unless you selected to opt out of that feature when you set up your account.
Federal Reserve Board Regulation T allows brokerage firms to lend clients up to 50% of the total purchase price of an equity security. Schwab further requires that the equity in an account be at least 30% of the current market value of the security. In this example, the current value of cash is $2,100, meaning you could purchase $4,200 worth of eligible securities using margin.
The securities used as collateral must maintain a minimum value relative to the account's margin debit balance. Schwab's basic maintenance requirement for equities is 30% of the current market value of the security; however, this varies depending on the stock.
In order to trade on margin, you start as you would any other trade.
First, roll over the Trade tab, click on All-in-One Trade Ticket. Begin by entering the symbol. Under Action, select Buy, then enter the desired quantity. Then select Order Type. In this example, Coca-Cola is currently trading at $63.77. This trade will exceed the $2,100 cash in the account, meaning 32 shares will be bought on margin. Buying an amount of shares that cost less than $2,100, the trade wouldn't be on margin.
You can check the security's maintenance requirement by selecting Margin. Then select Review Order to advance to the next page.
Review the trade to make sure everything looks right. Be sure to check the Order Messages at the bottom of the page for important information about the trade. If everything looks good, select Place Order to place the trade. Please note that shares you hold in money market funds will not be sold automatically to cover your margin borrowing.
And that's it. You can select Order Status to see the status of the trade. In this case, it has filled.
Once the trade executes, you can see how the trade on margin affects your account. To do this, roll over Accounts and click Balances to see the breakdown.
Looking at Borrowing, you can see how much you borrowed to place the trade. Balance Subject to Interest tells you the dollar amount that's subject to interest. Interest on a margin loan starts accruing upon settlement, which for equity securities is two business days. Finally, note the Month to Date Interest Owed, which tells you how much interest is currently owed. Margin interest is accrued daily and charged monthly.
