TD Ameritrade Holding Corp. (AMTD), Charles Schwab Corp (SCHW): Why Rising Margin Debt Might Not Spell Doom for Stocks

Is margin the smartest way to borrow?
At such low rates, margin loans become tempting not as a way to buy more stocks but rather as a way to finance other needs. Given that in some cases, margin loan financing costs are deductible as investment interest, the tax benefits are icing on the cake in combination with highly attractive rates.

But margin loans come with two dangerous characteristics. Margin rates are variable, and so if the Fed follows through on its warnings and eventually starts lifting short-term rates, then margin loans will automatically get more expensive. Unlike with fixed mortgage loans, there’s no way to lock in current low rates on margin debt.

Also, margin loans are subject to limits in comparison to the value of your stock portfolio. So if the markets plunge and you’ve overextended yourself by taking out margin debt, you could find yourself having to sell off stocks to repay those loans at exactly the worst time.

Nevertheless, if you keep margin debt at modest levels compared to the value of your portfolio, then it can be the most prudent financing option you have. Given the possibility that some of the climb in margin-debt levels comes from smart investors taking advantage of low rates, it doesn’t make as much sense to panic about the possible impact of margin debt as it might have made in the past.

The article Why Rising Margin Debt Might Not Spell Doom for Stocks originally appeared on Fool.com and is written by Dan Caplinger.

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Interactive Brokers and TD AMERITRADE. The Motley Fool owns shares of TD AMERITRADE.

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