When to use your broker for borrowing

Gayle B. Ronan

When the major stock market indices returned to levels first explored during the bubbly days of 2000 last year, the level of outstanding margin debt — loans backed by investments — also returned to its previous heights.

It reached $270.52 billion in November 2006, according to the figures released last week by the New York Stock Exchange.  That is just shy of the March 2000 record of $278.53 billion when the stock market speculation it helped support reached its peak.

Despite returning to a level last associated with outright investor frenzy, there is a resounding absence of hand-wringing these days. Also missing: pundits warning of an impending market collapse brought on by leverage-wielding speculators using margin to buy stocks.

“That is because no one believes we have a speculative frenzy like we had back then,” says Herb Kaufman, professor of finance with the W.P. Carey School of Business at Arizona State University in Tempe.  “There are real economic reasons for the stock market’s recent advance, unlike in 2000-2001.”

Individual stock valuations are also viewed as reasonable. “Price-to-earnings ratios were a lot higher in 2000,” says Tom Tracy, a principal with Kochis Fitz, a San Francisco wealth manager. “Today’s levels do not indicate rampant speculation.”

But if the rising level of margin debt is not fueling speculation, what is it being used for? 

“No one seems to regularly collect data on how margin debt is used,” says Kaufman, who adds he would not be surprised if it turned out margin debt is finding increased use as a lower-cost — but riskier — alternative to other forms of personal credit. 

According brokerage firm Charles Schwab, "We do not track what our clients use margins for, nor do we actively market borrowing on margin as a source of funds for paying personal expenses to our clients. But margin accounts are an easy source of credit for personal financing needs,” says Glen Mathison, a Schwab spokesperson in San Francisco. 

Once you open a brokerage account, there is generally no extra paperwork required to borrow on margin. But if the shares in your account lose value suddenly, you could find yourself subject to a "margin call" in which your broker can sell stock out of your account to maintain the equity in your loan.

Favorable rates, easy access
Despite the risk, the ease of borrowing can be appealing. There are no processing fees, fixed repayment schedules, nor typically any minimums or maximums. A brokerage firm client simply makes a withdrawal. Even the rates are comparatively low.

For instance, Raymond James, like many brokers, provides a schedule of rates on its Web site and lists margin rates at, near or below prime — the higher the loan balance, the lower the rate.

As attractive as rates are, they are also negotiable.

Tracy says his firm has obtained rate concessions as high as 3 percentage points for its wealthiest clients.  For the less wealthy and those borrowing smaller amounts, Tracy advises: It never hurts to ask, or shop around.  Discount brokers periodically compete to attract new margin borrowers.

Margin interest may even be tax-deductible. However, the money must be used to finance an investment — not an engagement ring.

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