This tool helps answer the questions:
  1. Should I invest with a margin loan to leverage investment returns, given today's loan interest rate, if that is low enough?
  2. Is there a potential arbitrage opportunity (free money) from investing in high-dividend preferred-stock ETFs with a margin loan?
  3. Am I prepared for the loss if the market turns unfavorable to me? How likely would I receive a margin call or, even worse, lose all the money I invested?
Margin Loan Feature clear
Initial equity (own fund)
Leverage X
Trading amount
Initial margin
Borrowing amount
Margin interest rate
Maintenace margin
Stock / ETF to buy
Dividend yield
Trading fee & commission
Holding period months
Adverse shock expected Set the maximum price drop percentage you can reasonably expect if an inferior incident occurs during the holding period. This can give you an idea of whether the margin call may happen.
Risk of margin call
Price change threshold
Margin call expected
Investment Return
Testing price change
Trading expenses
Dividend received
Loan interest
Net interest paid
Capital gain & loss
Holding-period total return
Total yield
Annualized yield
instruction icon What is margin loan?
A margin loan allows you to invest at an amount more than your own money (own fund, or called equity). This is done through your brokerage account, and margin trading is pre-approved by the brokerage firm, which you can borrow money from (as a loan), provided you maintain a certain level of your own fund in your account. For example, you have saved $10,000 and now want to consider whether to invest using a margin loan or not.
So, your initial equity is $10,000. If you want to have 2x leverage, namely raising the total invested amount to $20,000, you need to borrow another $10,000 from the brokerage firm.
After initiating the margin loan, when the share price increases by 50%, your total invested amount will appreciate $30,000 (=$20,000*(1+50%)).
However, when the share price you invested decreases by 50%, your total invested amount will depreciate to $10,000 (=$20,000*(1-50%)).
Margin loan allows you to leverage your brokerage account to make heavier investments. However, it's also a high-risk strategy and only right for some investors.
instruction icon Step-by-step instruction
Part 1

Filling in the margin loan feature

  1. 1
    To start, input your initial equity. This is the money you own and want to invest, for example, $10,000. Then, decide on the leverage. A leverage factor of 2 means you want to raise your total investment (trading amount) to twice your own funds. The initial margin is calculated as the initial equity divided by the trading amount. Different security types have different minimal initial margin requirements, according to the regulation and the broker's policy. For example, you may need to put at least 50 percent as the initial margin to purchase stocks but only need to put 30 percent to buy corporate bonds. The borrowing amount, equal to the trading amount minus the initial equity, is what you need to borrow from the brokerage firm using a margin loan.
  2. 2
    Check the margin interest rate. This is the borrowing rate of the margin loan. The rate can be found on your brokerage firm's website. For example, to check the current loan rates from Fidelity or Interactive Brokers. The rate will determine the interest cost you need to pay when using a margin loan. Unlike mortgage rates that are fixed for many years, the margin interest rate is floating and can change quickly with the market interest rates, which are affected by the Federal Reserve's decision. The margin loan rate is usually higher than mortgage rates. A higher loan rate will significantly lower your net investment yield when you invest this security longer with a margin loan. If you don't know the loan rate yet, don't invest using a margin loan.
  3. 3
    Maintenance margin requirement. Compared with the initial margin, the maintenance margin is the minimum amount of equity an investor must maintain in a margin account after making a purchase. When investing in stock securities, the maintenance margin is currently set at 25% of the total value in the account according to the requirements of the Financial Industry Regulatory Authority (FINRA). Some brokerage firms may raise the margin percentage to 30% to 40%.
  4. 4
    Estimate the dividend yield. You can find the forward dividend yield of the stock you want to invest from the public financial information. This example from Yahoo! Finance shows Apple Inc (AAPL)'s forward dividend yield of 0.48% (quarterly). To convert it to the annual yield to input here, simply multiply the yield by 4 (0.48% * 4 = 1.92%).
  5. 5
    Consider the trading cost. Today, most brokerage firms offer zero commission on trading listed stock online, so the trading cost will be only the minimal transaction tax when selling the stock, at about $0.02 per $1,000 traded, a rate of 0.002%. However, if your trading cost is significantly higher than zero, it would be better to consider it.
  6. 6
    Determine how long you will hold this stock. Holding stocks longer may generate larger potential appreciation and lower the capital gain tax if the holding period is longer than one year. Still, it will also incur more interest from the margin loan.
Part 2

Assess the likelihood of a margin call

  1. 1
    Prepare for the possible adverse scenario. Input an adverse shock percentage that the stock price might decline the most in a reasonable likelihood. For example, a small-size growth stock will possibly have a return of -40% during a year of downturn market, while a large-size value stock will perhaps have a less worse return of -20% due to its less riskiness.
  2. 2
    Be aware of how likely the margin call may happen. A margin call occurs when an investor's equity in a margin account falls below the broker's threshold. The broker then demands that the investor deposit additional cash or securities into the account to raise the % of the investor's equity to the minimum level indicated by the maintenance margin requirement. The threshold is calculated based on your leverage and the input of the maintenance margin requirement above. When the leverage is higher, or the required maintenance margin is higher, in a downturn market, you will have less buff (threshold) to absorb the loss, and a margin call will happen more likely.
Part 3

Analyze the benefits, costs, and risks

  1. 1
    Calculate the expected investment return. After filling in all required inputs, you can now analyze the investment return. Freely input a possible change in stock price, and you can get the crucial components of the investment return:
    • Trading expenses = Trading amount x Trading fee & commission x 2 (for buying and selling)
    • Dividend received = Trading amount x Dividend yield x Holding period / 12
    • Loan interest = -Borrowing amount x Margin interest rate x Holding period / 12
    • Net interest paid = Dividend received + Loan interest
    • Capital gain & loss = Trading amount x Testing price change
    • Holding-period total return = Capital gain & loss + Net interest paid + Trading expenses
    • Total yield = Holding-period total return / Initial equity
    In this example, when the stock price goes up 10% after three months, your net investment return is 18.2% after loan interest, demonstrating the significant impact of the 2x leverage provided by a margin loan.
  2. 2
    Test an adverse price change. Although margin loans can magnify your portfolio gains by allowing you to buy more securities than you could otherwise afford, you should not ignore the risk when the price drops. In the chart above, when the stock price drops 33%, not only is the loss double, but you may also receive a margin call because your equity falls below the maintenance margin required. Once a margin call is issued, unlike an investor not using a margin loan, who can hold the stock and wait for the price to bounce back, a margin loan investor needs to take one of these three actions immediately:
    • Deposit enough cash into the margin account to meet the maintenance requirement.
    • Move marketable securities from another account into the margin account, but this may take a few days to complete.
    • Sell some stocks in the margin account to pay off the margin loan, and you may immediately realize some loss.