Beginner Margin Questions

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hotelcalifornia
Posts: 38
Joined: Sat Jan 19, 2019 5:35 pm

Beginner Margin Questions

Post by hotelcalifornia »

Hello, I just enabled margin trading on my brokerage account. I have some very basic questions not related to trading strategy.

1. If I buy a stock with a $0 available balance I think Vanguard is buying the stock on margin and then taking the money from my bank account to cover the purchase within a day or so. Is my understanding correct and if so am I being charged interest on the purchase?

2. When buying a fund with cash I see this message from Vanguard, what does it mean?
Mutual funds have a 100% margin requirement.
After 30 calendar days, the shares you purchase will automatically move to a margin position.
3. I have a fund that is split into two listings on my holdings page; VEIPX and VEIPX (cash). What does that mean?
mutedbytes
Posts: 9
Joined: Mon Mar 15, 2021 1:55 am

Re: Beginner Margin Questions

Post by mutedbytes »

hotelcalifornia wrote: Thu Jun 10, 2021 2:54 pm Hello, I just enabled margin trading on my brokerage account. I have some very basic questions not related to trading strategy.

1. If I buy a stock with a $0 available balance I think Vanguard is buying the stock on margin and then taking the money from my bank account to cover the purchase within a day or so. Is my understanding correct and if so am I being charged interest on the purchase?

2. When buying a fund with cash I see this message from Vanguard, what does it mean?
Mutual funds have a 100% margin requirement.
After 30 calendar days, the shares you purchase will automatically move to a margin position.
3. I have a fund that is split into two listings on my holdings page; VEIPX and VEIPX (cash). What does that mean?
1) Margin is inherently collateralized so if your cash balance is $0 but you otherwise have equity in other holdings, you would be borrowing on margin against these holdings and charged interest. You would have to transfer money in yourself to pay back the loan if that was your intention. It seems you may have more to understand about margin in general and margin requirements before you head further down this path.

2) This is ultimately saying you cannot purchase the fund on margin. Any equity in purchased funds would have to be 100% yours.
Last edited by mutedbytes on Thu Jun 10, 2021 3:38 pm, edited 1 time in total.
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Wiggums
Posts: 3840
Joined: Thu Jan 31, 2019 8:02 am

Re: Beginner Margin Questions

Post by Wiggums »

hotelcalifornia wrote: Thu Jun 10, 2021 2:54 pm Hello, I just enabled margin trading on my brokerage account. I have some very basic questions not related to trading strategy.

1. If I buy a stock with a $0 available balance I think Vanguard is buying the stock on margin and then taking the money from my bank account to cover the purchase within a day or so. Is my understanding correct and if so am I being charged interest on the purchase?

2. When buying a fund with cash I see this message from Vanguard, what does it mean?
Mutual funds have a 100% margin requirement.
After 30 calendar days, the shares you purchase will automatically move to a margin position.
3. I have a fund that is split into two listings on my holdings page; VEIPX and VEIPX (cash). What does that mean?
Vanguard doesn’t take money from your bank account.
Vanguard website says, “When money is borrowed in a margin account, interest will be calculated on a daily basis and charged based on the total debit (borrowed) balance. The monthly interest period begins two business days before the beginning of each month and ends three business days before the following month's end.”

There is an interest rate % and a core %. The last time I checked the margin borrowing rate was 2 1/2% +6% For a total of 8.5%

Buying on margin means that an individual is investing with borrowed money. Although there are benefits, the practice is thus risky for the investor with limited funds.
alex_686
Posts: 8467
Joined: Mon Feb 09, 2015 2:39 pm

Re: Beginner Margin Questions

Post by alex_686 »

The rule is that you can’t margin a new issue for 30 days. Think about the chaos surrounding the opening of your average IPO. This rule has been around for 80+ years.

Technically speaking, when you purchase a mutual fund you are buying brand new shares. So you can’t initially margin them.

Now, you certainly can use available cash from your margin account to buy mutual fund. But “purchasing power” assumes that the assets purchase can be margined, which new mutual fund shares can not.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Topic Author
hotelcalifornia
Posts: 38
Joined: Sat Jan 19, 2019 5:35 pm

Re: Beginner Margin Questions

Post by hotelcalifornia »

Thanks for the great information, much appreciated!
How can I see the interest I am being charged on margined securities? I tried searching through my most recent account statement but could not find the interest charges.
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