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Margin Borrowing
How can margin borrowing work to my advantage?
What are the benefits of borrowing on margin?
How can I reduce the risks?
How does margin borrowing work?
What is the rate charged on margin loans?
Which securities are eligible as margin borrowing collateral?
Which securites are not eligible?
How do I activate my margin borrowing privileges?
Are there risks associated with margin borrowing?
How can margin borrowing work to my advantage?
As an investor, you have a convenient alternative to traditional credit sources. It's called borrowing on margin. Borrowing on margin lets you use your marketable securities held in your DLJdirect account as collateral for a loan.
What are the benefits of borrowing on margin?
Borrowing on margin is the extension of credit by DLJdirect to you. In return, you pledge to DLJdirect your securities as collateral for this loan. When you borrow on margin you can:
Purchase Additional Securities
The most common use of margin is to purchase additional securities using your existing assets as collateral for the loan. Margin borrowing allows you to respond to market changes and react quickly to new investment opportunities that may come along. Using margin lets you leverage your account and control your assets by borrowing against your current equity.
Protect Against Late Payments for Trades
Should DLJdirect not receive your payment for the purchase of securities, your payment may be covered by borrowing against the fully paid and marginable securities in your account.
Access Comparatively Lower Interest Rates
Margin interest rates are often comparable to, if not lower than, the prime interest rate -- the rate offered by banks to their best business customers.
Borrow Without a Preset Repayment Plan
When you access available margin credit, no fixed repayment plan is required for a margin loan unless there is a margin call or a maintenance call*. Interest on the outstanding balance is due and posted to your account monthly.
How can I reduce the risks?
There are several ways to reduce the risk of margin borrowing and enjoy its low cost and convenience.
Borrow less than the full loan value of your securities. That way, you can still benefit from leveraging and low cost borrowing, but you reduce your risk of having dramatic market fluctuations that could place you in a call situation.
Borrow against conservative investments. By margining only high quality stocks, government securities and other securities with proven track records you may lessen, but not eliminate, the risk of margin call situations.
How does margin borrowing work?
Borrowing on margin is governed by the Federal Reserve and allows you to obtain a loan for 50% of the market value of many stocks you may hold in your DLJdirect account.
For example, if you have $10,000 of fully paid for marginable stocks in your account you can borrow $5,000 -- or 50% of their value. Then you can use two times the amount that you borrowed ($5,000 x 2 = $10,000) to purchase additional marginable securities.
What is the rate charged on margin loans?
The cost of borrowing on margin is comparatively low as compared to other credit sources. As a general rule, margin loan rates are comparable to if not lower than the prime interest rate. Margin rates are also generally lower than the current rate of interest charged by most credit cards.
If you borrow on margin, your margin interest rate will be based upon DLJdirect's Base Lending Rate. This rate, set at DLJdirect's discretion, set with reference to commercially recognized interest rates, industry conditions relating to the extension of credit, and general credit market conditions. You can find the current margin borrowing rate on the DLJdirect Rateboard or feel free to contact us. As of 10/22/98, the DLJdirect Base Lending Rate (DBLR) was 7.25%.
DLJdirect's Lending Rates are calculated on the amount that you borrow and are listed below:
Average Margin Balance Margin Schedule Current Rate
$0 - $24,999 DBLR + 1.50% 8.75%
$25,000 - $49,999 DBLR + 1.00% 8.25%
$50,000 - $99,999 DBLR + .50% 7.75%
$100,000 - $249,999 DBLR + .25% 7.50%
$250,000 - $999,999 DBLR 7.25%
$1,000,000 and over DBLR - 0.5% 6.75%
The DLJdirect Base Lending Rate may change without prior notice. When the DLJdirect Base Lending Rate changes during an interest period, interest will be calculated according to the number of days each rate is in effect during that period. If the rate of interest charged to you is changed for any other reason you will be notified at least 30 days in advance. There is no set repayment schedule, but interest is posted to your account monthly.
Which securities are eligible as margin borrowing collateral?
Below are the securities you may use as collateral for margin borrowing:
All Stocks trading for $5.00 or more listed on the New York Stock Exchange and other major US Exchanges, Most NASDAQ traded over-the-counter securities, Treasury, Corporate, Municipal, and Government securities.
Which securites are not eligible?
The Federal Reserve mandates that the following securities are not eligible to be pledged as collateral for margin borrowing privileges:
Mutual Funds held less than 30 days,
Securities held in a retirement account,
Securities held in a custodial account,
CDs,
Precious Metals, and
Annuities.
How do I activate my margin borrowing privileges?
If you already have a DLJdirect account but have not activated the margin borrowing privilege of your account, please E-Mail DLJdirect or send a letter stating that you would like to activate your margin borrowing privileges. You will be contacted within one business day as to the approval of your request for margin borrowing privileges.
Are there risks associated with margin borrowing?
Beware of something that sounds too good to be true. Where there are rewards there are also risks -- while margin borrowing offers potentially greater rewards, it also involves greater risk that must be recognized and understood. Margin financing involves the extension of credit and is not appropriate for every investor. Please carefully review your investment objectives, financial resources and tolerance for risk to determine whether margin financing is appropriate for you.
* Margin and maintenance calls are results of a decrease in the minimum equity required in your account. An immediate deposit of funds is required to satisfy the amount of the call.
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