When you invest on margin, you borrow either cash or securities from your broker to complete investment transactions. You're usually required to come up with just a percentage of the amount needed for a securities purchase or short sale while paying interest to finance the rest based on an approved line of credit.
This allows you to increase your "buying power"—the amount of money available in your account to purchase marginable securities. For example, if you have $50,000 in your money market settlement fund, your buying power is actually $100,000, because you're required to deposit just 50% when buying or selling short* most marginable securities.
To keep your line of credit open, you must maintain a certain amount of equity—the current value of your assets less the amount of the margin loan—in your account at all times. Margin trading can increase your return on an investment, but there's also potential for significant loss. At Vanguard Brokerage Services®, margin investing is allowed only with our prior approval for nonretirement brokerage accounts. It's not permitted for retirement accounts, UGMA/UTMA accounts, and certain other types of accounts.
Once approved, you can trade most eligible securities on margin, including:
Over-the-counter (OTC) securities traded through Nasdaq or the National Market System.
OTC securities approved by the Federal Reserve Board.
Government, municipal, and corporate bonds.
Vanguard Brokerage margin rate interest schedule
When funds are borrowed in a margin account, interest will be calculated on a daily basis and charged based on the total debit (borrowed) balance. Interest charges will start to accrue on margin transactions involving borrowed funds on the settlement date and will post to your account around the end of each month. As of December 1, 2012, the Vanguard Brokerage base lending rate is 6.5%. The effective rate, or true interest rate, is the base lending rate plus the interest rate.
(Interest rate plus 6.5% base rate)
To request approval to trade on margin, you can download and complete the Vanguard Brokerage Margin Account Application. If you don't have a Vanguard Brokerage account, you can't request margin trading.
Investments are subject to market risk. Bond funds have interest rate risk, the risk of issuer default, and inflation risk.