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Finance Glossary

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Margin Debt


Margin debt usually refers to the notion of borrowing from yourself—or at least from your investments.

If you have a bunch of stocks, you can set them up at Schwab, E*TRADE, Scottrade, or any other brokerage. You pledge your $50,000 or whatever of stocks, and if the brokerage lets you margin up to 50%, you can borrow up to $25,000 from yourself. You can use that money to pay for something (like a car) or to pay for more investments.

You'll pay margin interest on the money you borrow, but it's cheaper than most types of financing if you want to buy a car or boat. If you use the cash to buy more investments, you're earning profit on a bigger bunch of money, so the idea is that your investments grow faster and you can get rich that much quicker.

As with any debt, there's a risk. The big risk here? That you're using your securities to borrow money. What happens if the prices of your securities drop? The brokerage will get really nervous, and you'll go through a margin call. That's when someone from the brokerage contacts you and tells you very nicely that you need to put more money in your account because you owe more than you have in stocks.

If you can't pony up the cash, you might have to sell some of your investments (which might mean paying taxes on the profits).