Margin for the Modern
Independent Investor

Jason Kobely: Trading on margin can boost your buying power, using your portfolio assets as collateral. For those looking to take advantage of market opportunities and respond quickly, it's a go-to tactic that can help elevate your portfolio to the next level. And once an investor gets a handle on how to integrate margin trading into their account, they soon discover there are some other crafty benefits to being a seasoned margin user. To talk about the ins and outs of margin trading and how it can be a valuable portfolio building tool is Axos Invest Senior Vice President and Chief Investment Officer Tracy Gallman. First off, Tracy, it feels like there's kind of a lot of mystery around margin trading for those who have never tried it before. So, can you offer up kind of a quick primer on exactly how margin trading works?

Tracy Gallman: Definitely, Jason. And yes, we don't want anyone to be afraid of margin. We really want everyone to understand and embrace this opportunity one has to basically borrow or buy on margin. So simply put, margin refers to the amount of equity an investor has in their brokerage account. To margin or buy on margin means to use money borrowed from a broker to purchase securities. You have to have a margin account to do so, rather than a standard brokerage account. A margin account is a brokerage account in which the broker lends the investor money to buy more securities than what they could otherwise buy with the balance in their account. So, using margin to purchase securities is effectively like using the current cash or securities already in your account as collateral for a loan. The collateralized loan comes with a periodic interest rate that must be paid. The investor is using borrowed money and therefore both the losses and gains will be magnified as a result. Margin investing can be advantageous in cases where the investor anticipates earning a higher rate of return on the investment than what they are paying in interest on the loan.

Jason Kobely: So here at Axos, what are the basic requirements that an investor needs to satisfy, to be approved for margin trading?

Tracy Gallman: So, Jason, at Axos, an initial investment of at least $2,000 is required for a margin account. We allow investors to borrow up to 50% of a securities price, and investors must keep an equity percentage of at least 25% in a margin account.

Jason Kobely: Are there any securities where a margin line of credit can't be used? trading?

Tracy Gallman: Yes. Securities that are falling below $5 in stock price, those can typically not be used to purchase on margin. And any assets that are inside an individual retirement account, IRA account, Roth or traditional, cannot have margin trading on them. These are considered cash accounts only. Now, one particular security that a lot of investors don't know can be used as collateral is the mutual fund. Mutual funds can be used as collateral for a margin loan. So, these mutual funds can be transferred over into a brokerage account and used for collateral. But if there are new purchases of mutual fund shares, these new purchases of mutual fund shares must be held for 30 days before they can become eligible as margin collateral. But because mutual funds are very diversified, these can be a really good tool to use as collateral in that margin loan for additional borrowing.

Jason Kobely: So, depending on what happens with a security bought on margin, there is the potential that an investor could be asked by their broker to meet a margin call. Explain a little how a margin call works.

Tracy Gallman: So, there is a restriction called the maintenance margin. This maintenance margin is the minimum account balance you must maintain before your broker will force you to deposit more funds or sell stock to pay down your loan. Maintenance margin is the minimum amount of equity that an investor must maintain in the margin account after the purchase has been made. The maintenance margin is currently set at 25% of the total value of the securities in a margin account. The investor may receive a margin call if the account equity falls below the maintenance margin threshold, which may necessitate that the investor liquidate positions until the requirement is satisfied. A margin call will kick off a notification to you from your brokerage account to add money to your account or close out positions to bring your account back to the required level. If you're not able to be responsive to the margin call, your brokerage firm can close any open positions to bring the account back up to the minimum value. Understand that brokerage firms can do this without your approval and can choose which positions to liquidate.

Jason Kobely: So, margin is often used to just acquire a bigger holding. But it can also be a key tool in diversifying your portfolio, correct?

Tracy Gallman: That's right, Jason. The more diversification there is in a portfolio, the more likely there will be less volatility. And this is very important when working with margin because you really want that account to move upwards as much as possible. So, one technique to diversification is to consider using exchange traded funds to create a diversified portfolio. Exchange traded funds are baskets of securities structured with a set of rules or focused on a specific theme or asset class. Many ETFs have risk controls built into them. Now, another great way to use margin is to diversify a portfolio dominated by a large block of stock from one company. We have over the years seen considerable growth in very specific stocks. And margin has been really helpful with investors in diversifying. They can get approved for margin, then use the loan proceeds to diversify the portfolio without having to sell the original shares of stock. So, this can be particularly helpful if there's a large unrealized capital gain and investors want to keep that unrealized capital gain there but diversify.

Jason Kobely: Well, and with this margin line of credit, it can have implications beyond your portfolio because this borrowed cash doesn't have to stay just in your Axos Invest account, does it?

Tracy Gallman: That's right, Jason. Once the account has added a margin agreement for margin borrowing, a loan can be taken out at any time without any additional forms or applications. This ready access to cash can prove convenient in several scenarios, such as maybe you have an unexpected bill, you have maybe your daughter is getting married. You need some cash to access for that or any other types of household items that you might need this extra cash. So, at Axos, you can access your margin line through our money movement, through using our robust online client portal tools and easily direct that margin into your Axos checking account.

Jason Kobely: For those interested in trying margin trading, how would you recommend that a novice investor get started using margin responsibly? Are there any hard and fast rules that you suggest that an investor follow to help make sure they don't get in over their head?

Tracy Gallman: So, Jason, I have five tips here as investors think about margin. The first one is to have a cash cushion in the account. This is going to help reduce the likelihood of a margin call. The second is to prepare for volatility. Prepare to be as diversified as you can so that you can withstand fluctuations in the overall value of your collateral without falling below that minimum equity requirement. Invest in assets that you believe have return potential. The securities that you buy on margin should at minimum have the potential to earn more than the cost of interest on the loan. Set a personal trigger point. Keep additional financial resources in place to contribute to your margin account when your balance approaches the margin maintenance requirement. The interest charges are posted to your account monthly, so you'll be paying these down before they build to unmanageable levels. So, know that you have interest. At Axos, we have an Elite program that you can join to lower those interest costs of your margin loan. But where there are additional savings around those interest rates, consider those and utilize those benefits as much as much as possible and then you'll really be able to maximize more of the return on your margin borrowing.

Jason Kobely: Thanks, Tracy. So again, if trading on margin sounds right for you, you need at least $2,000 in assets in your Axos Invest self-directed trading account to be approved for margin trades. To apply, just send a secure message through the Axos app and you'll receive the form you need to return to get approved. You can also email us to get that application That's at [email protected] or call Axos Invest and talk to one of our representatives. The number is 888-585-4965.