What it means
A broker does not lend against every security at the same rate. Each holding is assigned a loan value, which is the percentage of its market price that can be borrowed against.
Large, stable and widely traded shares may have a high loan value, while small, volatile or low-priced shares may have a low one or none at all. Adding up the loan values of all eligible holdings gives the total borrowing capacity of the account.
Subtracting the margin debt already outstanding gives the margin loan availability. The result is the extra borrowing the investor can use, either to buy more securities or, in some accounts, to take cash out.
The number changes every day. If the market value of the holdings rises, the capacity rises and more can be borrowed.
If prices fall, capacity shrinks, and if it drops below the existing loan, the account goes into a margin shortfall that must be corrected. Borrowers should keep a buffer rather than using all of the availability.
A portfolio can lose value suddenly, and a broker can also raise its requirements on particular securities with little notice. A rule of thumb used by cautious investors is to borrow well below the limit.
Margin loan availability is different from buying power. Buying power often refers to the value of securities the investor can buy, which is a multiple of the cash available, while availability refers to the borrowing capacity of the existing portfolio.
Statements and trading platforms use these terms in different ways, so it is worth reading the definitions. Some brokers also apply concentration rules.
If a large share of the portfolio is in a single security, the loan value on that holding may be reduced, because a fall in that one share could threaten the whole loan.
In practice
Real-world examples.
Example
A business owner holds a diversified portfolio of blue chip shares and wants short-term funding. She checks her margin loan availability before drawing $50,000 for a tax payment, so that she keeps a cushion. She draws only half of what is available.
Example
An investor sees a promising opportunity and wants to buy more shares. His broker's platform shows that availability has fallen because his holdings lost value, so he buys fewer shares than he planned. He decides to wait until his holdings recover.
Example
A broker raises the loan value requirement on a volatile small company share after a regulatory warning. Clients holding it see their availability drop overnight and some must reduce their borrowing. The broker sends notices explaining the change.
Formula
Calculation
Margin loan availability = Sum of (Market value of each holding x Its loan value percentage) - Existing margin debt
An investor holds $120,000 of large, stable shares with a 70% loan value and $80,000 of volatile shares with a 30% loan value. Borrowing capacity is $120,000 x 0.70 + $80,000 x 0.30 = $84,000 + $24,000 = $108,000. With an existing margin loan of $30,000, the availability is $108,000 - $30,000 = $78,000. If the volatile shares fall by 25% to $60,000, their loan value drops to $18,000, capacity falls to $102,000, and availability becomes $72,000.Case study
Seen in the real world.
Pelham Family Office is an illustrative, fictional investor that held a $2,000,000 portfolio. At a blended loan value of 60%, its borrowing capacity was $1,200,000, and it had borrowed $500,000, leaving availability of $700,000.
The managers drew a further $300,000 to fund a property deposit. After a 20% market fall, the portfolio value dropped to $1,600,000, capacity fell to $960,000, and the $800,000 loan sat close to the limit.
In this illustrative story, the office sold some holdings to repay part of the loan and kept availability above 20% of capacity from then on. The lesson was that borrowing capacity is not a fixed number but moves with the market. The office also agreed an internal limit of half the broker's maximum.
Watch out
Common mistakes.
- Treating the current availability as a stable amount, when it moves with prices and with the broker's rules, sometimes within a single trading day.
- Borrowing close to the limit, which leaves no room for a market decline.
- Assuming all holdings count equally, when some securities carry a low loan value or none at all, such as very low-priced or newly listed shares.
Questions
People also ask.
How is margin loan availability calculated?
Add the loan value of each eligible holding, then subtract the margin debt already outstanding.
Can I use the availability for anything?
Often yes, within the broker's rules, although some uses, such as buying certain securities, may be restricted, and borrowing for other purposes may have different tax treatment.
Why did my availability fall when I did nothing?
Falling prices, a change in the loan value of a holding or accrued interest can all reduce it.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related