See the benefits of margin investing | Vanguard (2024)

Margin investing

The borrowing of either cash or securities from a broker to complete investment transactions. You're usually required to come up with just a percentage of the amount needed, while paying interest to finance the rest based on an approved line of credit.

Marginable security

A security that meets the Federal Reserve requirements for being bought and sold in a margin account.

Funds available to trade

The amount of money available to purchase securities in your brokerage account. It includes your settlement fund balance, pending credits or debits, and margin cash available (if approved for margin).

The figure is adjusted for open orders to purchase stocks or ETFs at the market or to purchase Vanguard mutual funds or mutual funds from other companies. Money recently added

Margin account

A brokerage account that allows you to borrow a percentage of a security's value from the broker to purchase that security. If the value of the stock drops substantially, you're required to deposit more cash in the account or sell a portion of the stock.

Settlement fund

This holds the money you use to buy securities, as well as the proceeds whenever you sell.

Equity

In a margin account, the value of your securities minus the amount you've borrowed from your brokerage firm.

Interest rate

The amount or rate you pay when you borrow money.

Capital gain/loss

The difference between the sale price of an asset (such as a mutual fund, stock, or bond) and the original cost of the asset. A capital gain/loss is "unrealized" until the investment is sold, when it becomes a realized gain/loss. Realized gains are taxable and they may be considered short-term (if the investment was owned one year or less) or long-term (if the investment was owned for more than one year).

Freeriding

Buying and selling securities in a cash account without covering the initial purchase.

Stock

A security that represents part ownership, or equity, in a corporation. Each share of stock is a proportional stake in the corporation's assets and profits, some of which could be paid out as dividends.

Bond

A debt security (IOU) issued by a corporation, government, or government agency in exchange for the money the bondholder lends it. In most instances, the issuer agrees to pay back the loan by a specific date and make regular interest payments until that date.

NASDAQ

A computerized system that provides up-to-the-minute price quotations for securities traded over-the-counter as well as for many securities listed on the New York Stock Exchange.

National Market System

A system that facilitates trades of over-the-counter stocks meeting specific criteria and requires all exchanges to post prices simultaneously. It is sponsored by FINRA (Financial Industry Regulatory Authority) and Nasdaq (National Association of Securities Dealers Automated Quotations).

Warrant

An entitlement to purchase a certain amount of common stock at a set price (usually higher than the current price) during an extended period of time. Usually issued with a fixed-income security to enhance its marketability, a warrant can be transferred, traded, or exercised by the holder.

Call and put options

The right to either buy (call option) a specific security at an agreed-upon price or sell (put option) a specific security at an agreed-upon price sometime in the future.

Common stock

A security that represents ownership in a corporation. Holders exercise control by electing a board of directors and voting on corporate policy. In the event of a company's liquidation, common stockholders have lowest priority and receive assets only after bondholders, preferred stockholders, and other debt holders have been paid in full.

Preferred stock

A security that takes precedence over common stock when a company pays dividends or liquidates assets. Preferred securities do not usually carry voting rights.

Rights

An offer given to current shareholders allowing the purchase of additional shares or securities before it's offered to the public. This allows existing shareholders to retain a proportional interest in the company.

Over-the-counter (OTC) Security

Securities that aren't listed and traded on an organized exchange. Many OTC stocks are traded through the OTC Bulletin Board (OTCBB) or Pink Sheets.

Initial public offering (IPO)

A corporation's first offering of common stock to the public.