Is Basic Capital a form of margin trading?

To be clear, Basic Capital isn’t a margin account, it’s not a form of margin trading, and there are no margin loans involved in opening a Basic Capital IRA.

Basic Capital gives you the ability to increase your buying power using term loans, rather than margin loans. The Basic Capital investment strategy takes advantage of borrowed funds, but unlike margin trading, the loans are paid back over time on a fixed term, and you bear no risk of getting a margin call.

In order to understand why it’s important that Basic Capital isn’t a margin lending product, we need to review what margin trading is, and how it works.

How does margin trading work?

Margin loans have long been tied to the stock market. In the early days of Wall Street, brokers began offering clients the ability to borrow funds against their securities. It was a straightforward proposition: If you had a strong opinion that the investment would go up in value, you could borrow excess funds to amplify the gain. Sounds great, right?! Not quite.

Originally, "margin" referred to the blank space on the edges of a page. In finance, it's the money you put up that forms a buffer against losses for the margin lender. Just like the empty space on a page, it gives you some room for error in case your investments drop in value.

The key defining feature of a margin loan is that you have to maintain a certain margin of error or buffer for losses. And if you don’t, you may experience a margin call, or you run the risk that the lender will then sell the asset and take their money back, essentially forcing you to realize losses on what could’ve been a temporary using the stocks themselves as collateral.

Notice, a margin loan doesn’t have a repayment schedule or a defined maturity, it’s a loan that you are allowed to hold onto as long as you “maintain” the agreed upon buffer.

Is trading on margin a good idea?

Despite the substantial role margin trading plays in stock market investing, it can magnify risk. While that strategy has worked out for many, the common consensus is that it’s impossible to predict the next move the market will make, and that margin trading is a risky proposition.

Margin lending originally grew in popularity during the 1920s, and it offers a cautionary tale: investors flooded the market, using borrowed money to buy stocks, and created an asset bubble that ultimately burst. Investors who borrowed on margin lost not only the money they invested but also accrued outstanding debts to repay.

Since then, margin loans have been subject to stricter regulations, but their essential nature remains unchanged. Investors use them to buy stocks or other securities with borrowed money, with the value of those securities acting as collateral. Interest rates are variable, and there are greater risks due to uncontrollable market conditions. If the value of the securities your purchase with margin drop too much, you may be forced to sell at a loss to repay the loan.

How are term loans different?

Unlike margin loans, Term Loans have a predefined maturity and repayment schedule. Terms loans are more like a traditional bank loan you’d take out to buy something big, like a car. The bank gives you a set amount of money, you agree to repay it over a fixed schedule (say 5 years). The reference point of the FHA mortgage, the 20th century innovation that underpins access to capital for the purpose of buying a home, is why we call Basic Capital “the mortgage for your retirement.”

Historically, term loans have been a cornerstone of corporate finance as well. In the 20th century, as businesses grew more complex, the need for large-scale borrowing led to the formalization of term loans as a reliable way for companies to finance expansions, acquisitions, and other significant capital expenditures. Unlike margin loans, term loans are typically secured by hard assets—real estate, machinery, or inventory—which minimizes the lender’s risk.

Whereas margin loans are flexible and dynamic (you can amend the size or maturity provided you maintain the margin), term loans provide stability and peace of mind. For companies, they were predictable. Repayment schedules allowed them to plan, and fixed interest rates offered protection from market volatility. For lenders, the predictability of cash flows and security of hard assets provided assurance, even in cases of default.

Do brokerage firms offer term loans?

While the traditional uses of term loans are well-known, there is a shift happening. Today, term loans are finding novel applications, especially as the nature of assets changes. One emerging trend is using term loans to finance investments in liquid intangible assets, such as exchange-traded funds (ETFs). In fact, that is the very thinking behind Basic Capital.

In the past, term loans were secured by physical assets. But what happens when the asset is intangible, like an ETF portfolio? Here, the concept of “asset-backed” borrowing gets a twist. ETFs, though intangible, are highly liquid. This liquidity is attractive to both investors and lenders.

Basic Capital is working to build the infrastructure that will enable term loans where ETFs act as collateral. The idea is similar to margin loans but with the structured predictability of a term loan.

To be clear, if you are an ultra high net worth client of a large private bank, you can access term loans to finance your investments. But these services are open only to ultra high net worth individuals given the degree of operational maintenance involved. To finance you art purchases and even sometimes even to finance your commitments to other financial institutions like venture capital and private equity.

Comparing margin loans and term loans

Margin loans offer immediacy. They allow investors to act quickly, taking advantage of short-term opportunities in the market. However, with that immediacy comes risk. Variable interest rates and the possibility of margin calls mean that losses can spiral quickly in a volatile market. Additionally, something called “maintenance margin” means that the largest loan to value ratio an investor can get is 4 (meaning that with $10,000 in your brokerage account, the largest amount of purchasing power you would ever have is $40,000). Additionally, margin requirements can change depending on the performance of the investment an investor makes with margin funds.

Term loans, on the other hand, offer predictability, and in the case of Basic Capital, even greater buying power than margin loans. With term loans, payments are scheduled, and the risk of sudden liquidation is far lower. This makes term loans attractive for long-term investments (and better suited for investors with a lower risk tolerance) which is, in our view, where most investors should allocate their additional funds.

However, term loans are not without their own limitations. They lack the flexibility of margin loans. Where margin loans allow for quick access to funds, term loans require more planning, often involving more rigorous credit checks and approval processes. For this reason, term loans have been an entirely unavailable tool for individuals looking to make long term investments.

Is Basic Capital a margin loan?

Basic Capital isn’t a margin account, it’s an IRA with a fixed term self-amortizing loan. It’s a new investment product that actually has nothing to do with margin at all.

By structuring your Basic Capital strategically, we can offer predictability of term loans, and the security of limited liability. There are none of the risks of margin, no change in loan terms due to underlying stock price movements, no minimum margin, and most importantly, there is less complexity for you: the investor.

Basic Capital represents an effort to translate a tool used in corporate finance to a tool that can be used by everyday investors looking to improve the rate at which they build wealth, and plan for retirement.

This innovation is understandably hard to grasp, despite its simplicity. There has been and will continue to be skepticism about Basic Capital really being a margin account. It’s not. There are those who will question how there have been no scaled trading strategies like Basic Capital before.

Fortunately, we plan to be here for the long haul. We believe that every American should have greater buying power, greater ownership of the market, and that one way to do that is to build more ways to experience the magic of compounding.