Buying stocks through margin lending

Margin transactions involve buying securities with borrowed money.

Brokerage firms can lend their customers money to purchase securities and keep the securities as collateral, allowing the customer ride the inherent risk of the stock without the requirement of purchasing 100% of the stock.

The example below taken from a study guide to corporate finance that I am reading outlines how margin lending operates in U.S and defines some of the key concepts in margin lending.

The required equity position and the initial margin requirement

The margin lending rate is usually 1.5 percentage points above the bank call money rate (which is about 1 percentage point below the prime rate). In the U.S., margin lending limits are set by the Federal Reserve Board under Regulations T and U. The required equity position is called the margin requirement. The initial margin requirement is currently 50 percent. This means the borrower must provide 50 percent of the funds in the trade. An initial margin requirement of 40 percent would mean that the investor must put up 40 percent of the funds and the brokerage firm may lend the 60 percent balance. Continue reading Buying stock through margin lending; leverage and margin calls →