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Brokers With Lowest Margin Rates

Written By

James Barra

Written By

James Barra

James is an investment writer with a background in financial services. As a former management consultant, he has worked on major operational transformation programmes at prominent European banks. James authors, edits and fact-checks content for a series of investing websites.

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Edited By

Jemma Grist

Edited By

Jemma Grist

Jemma is a writer, editor and fact-checker focused on retail trading and investing. Jemma brings a unique perspective to the forex, stock, and cryptocurrency markets and works across several investment websites as a researcher and broker analyst.

» Jemma Grist Profile Page

Fact Checked By

William Berg

Fact Checked By

William Berg

William contributes to several investment websites, leveraging his experience as a consultant for IPOs in the Nordic market and background providing localization for forex trading software. William has worked as a writer and fact-checker for a long row of financial publications.

» William Berg Profile Page

Updated

Jul 24, 2024

Brokers with lowest margin rates are highly sought after by traders with a large risk appetite and designs to make serious money from their investment accounts. Such brokers are also popular amongst cost-conscious retail investors, especially during periods of market volatility.

This guide delves into the world of low margin rate brokers, explaining the underlying concepts behind margin trading, and detailing the benefits for traders that open accounts with brokers offering the lowest margin rates.

What Is A Margin Trading Account?

A margin account is a powerful tool for investors that allows trades or investments to be made that are worth more capital than what is being put down.

Margin refers to the fraction of the full trading amount that the investor provides to open a position; a margin rate is a form of commission charged on the trade, often provided as a percentage. This is why margin traders look for brokers with the lowest margin rates. Most brokers will require a minimum invested account balance to access margin.

In traditional markets, the borrowed funds used to open a position are usually provided by an investment broker. However, in cryptocurrency trading, funds may be fronted by other traders who earn interest based on market demand for margin funds. In other cases, the cryptocurrency exchange itself may provide margin account funds to its customers.

More information on margin trading can be found here.

Margin Rate

With trading on margin being much like taking out a bank loan, traders must also pay a fee, or interest, on the loan. These are referred to as margin rates, and they vary between brokers and accounts.

Margin rates are often a few percent and are charged on the leveraged capital, not the margin fronted by the trader. Brokers with lowest margin rates offer particularly competitive account conditions.

Much like loan interest, the best scenario for an investor is the lowest broker margin rate, as this minimises the cost of the overall trade.

Depending on the margin account rate that the broker offers, you may also have to pay periodic interest payments in the same way you would pay interest on a bank loan.

Most brokerages will also offer their best margin rates for those traders with higher levels of investment capital in their accounts.

It is important to fully understand the fee structure of a broker’s margin investing options to optimise the use of margin and maximise profits.

Margin Example

Now let’s look at an example that shows the benefits of brokers with lowest margin rates. If a trader were to invest $25,000 cash into an unleveraged account for a period that produces a 10% yield, they would walk away with a profit of $2,500 and a new total capital of $27,500.

However, if they were to invest $25,000 and also take on a margin debt of $25,000, the total investment capital would be $50,000. For the same account yield of 10% and the same timeframe, an initial return of $5,000 would be produced. However, the margin cost must be determined from the margin rate and deducted from this value. For example, if the margin rate is 5%, then $1,250 (5% of $25,000) must be paid back to the broker, resulting in a net profit of $3,750 and a new capital of $28,750.

Consider now the same investment but with a lower margin rate of 1%. In this case, the margin cost would be $250 (1% of $25,000) and the net return would equal $4,750. Clearly then, maximum profit exposure is created by the broker with the lowest margin rate, as they take the least from the trade’s returns. In the example above, the 1% margin rate afforded the trader an extra $1,000 profit.

Risks

While using margin trading accounts may seem a no-brainer, especially through online brokers with the lowest margin rates, it is deceptively dangerous. Consider again the above example, only this time the investment backfires and the portfolio yield is -10%. In an unleveraged scenario, the investor would lose $2,500 and walk away with $22,500. In the leveraged case with a 5% margin rate, the investor not only loses the $2,500 from their own investment and pays the same $1,250 margin cost, but they must also front the losses on the margin debt (another $2,500), totalling a net $6,250 loss.

Additionally, traders must be careful about using margin for small trades, as the returns from the investment need to be larger than the margin cost. If not, the margin cost would have to be paid by the trade profit and some of the investment capital, resulting in a net loss for the investor despite the trade being profitable at face value.

Pros Of Brokers With Lowest Margin Rates

The benefits of using brokerages with the lowest margin rates are:

• Less interest to accrue
• Amplification of return rates due to more affordable account borrowing

Cons Of Brokers With Lowest Margin Rates

Opting for brokers with lowest margin rates can also be disadvantageous:

• Interest costs apply until fully repaid
• Only beneficial if a trade is successful
• Rapid profit generation can be difficult
• Margin trading is a debt that must be repaid
• A larger account deposit is often required than for higher rates

Final Word

Margin trading is an opportunity for investors to magnify their gains, though it can add complexities and risks not otherwise required. Thorough research should be carried out into the brokers offering the lowest margin rates, which should be combined with other considerations before selecting a broker to open an account with. If margin trading is for you, brokers offering low rates will facilitate larger profits for the same risk exposure.

FAQs

What Does It Mean To Trade On Margin?

Trading on margin entails borrowing money from a broker to carry out trades. Traders deposit cash that serves as collateral for the loan, then pay ongoing interest on the borrowed money. This loan allows investors to buy a larger quantity of securities which automatically serve as collateral for the loan.

What Are The Benefits Of Brokers With Lowest Margin Rates?

Margin accounts becomes advantageous when your rate of return is higher than the interest on the loan. Brokers offering the lowest margin rates will eat into your profits less.

Which Broker Has The Best Margin Rates?

Most traditional brokers have margin rates of around 8%. Interactive Brokers and M1 Finance offer competitive margin rates of around two or three percent, depending on the base currency and investment capital size.

Which Forex Brokers Have The Cheapest Margin Rates?

Interactive Brokers has an entire platform dedicated to forex trading that supports 23 different currencies. Its margin rates range from 0.5% on large loans for premium account holders to 9% for lite members.

Can You Negotiate Margin Account Rates?

Margin rates are not always fixed at those published on the broker websites. Given a large amount of capital often involved, brokers can sometimes be negotiated with the get better margin rates. If you are with an existing broker and want a lower margin rate, it may be worth contacting them first.