Investors have long sought ways to increase their purchasing power beyond what their investable capital allows. One common method to do this is through margin loans, to borrow against your investments to amplify potential gains. But margin trading comes with serious risks. If the market dips, you may be forced to sell at a loss, even if your investments are sound over the long term.

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 401(k) or IRA. We give you the ability to increase your buying power using preferred equity financing, not loans and not margin. The Basic Capital investment strategy takes advantage of additional financing, but there are no margin calls and no forced liquidation.

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

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 dip 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 you purchase with margin drop too much, you may be forced to sell at a loss to repay the loan.

How is preferred equity financing different?

Unlike margin loans, preferred equity financing has no risk of margin calls. Preferred equity financing is not a loan, and it doesn’t require principal repayment on a schedule. Instead, capital is provided to your account in exchange for a structured return over time. The payment of that capital occurs when you decide to withdraw funds when you’re ready to retire.  

This is why we call Basic Capital “the mortgage for your retirement.” While it’s not a self-amortizing mortgage like the one you’d use to buy a home, it’s structurally closer to an interest-only mortgage. You pay a fixed cost along the way, and the full amount is typically settled when you retire. In some cases, repayment may also occur earlier, such as during a rollover, a conversion to another provider, or a distribution.  

Historically, preferred equity has been a cornerstone of institutional finance. In the 20th century, as businesses grew more complex, so did their need for flexible growth capital without taking on traditional debt. With Basic Capital, that same structure is now available to individual investors.

Whereas margin loans are flexible and allow you to adjust your exposure (provided you maintain your margin), preferred equity provides stability and peace of mind. For long-term investors, this means you can plan ahead without any surprises. For capital providers, it offers a reliable return without needing to rely on risky day trading.

Do brokerage firms offer preferred equity financing?

Traditionally preferred equity financing has been limited to institutional investors and high-net-worth individuals, often accessed through private banking or complex legal arrangements. These structures are typically used to fund private equity deals or other long-term investments, not personal retirement accounts. They’ve remained out of the reach for most people, largely due to their complexity and, even more so, the high capital requirements involved.

We’re here to change that.

Basic Capital is working to build the infrastructure to make preferred equity financing available inside a tax-advantaged IRA or 401(k). It’s a way to amplify retirement contributions using long-term investment capital, without the risk of margin trading.

Comparing margin loans and preferred equity

Margin loans offer immediacy. They allow investors to act quickly and take advantage of short-term opportunities in the market. However, with immediacy comes risk. Variable interest rates and the possibility of margin calls mean that losses can escalate quickly in a volatile market. Additionally, something called “maintenance margin” limits how much you can borrow. Often, the largest loan-to-value ratio an investor can get is 4:1 (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 how the investments purchased with borrowed funds perform.

Preferred equity financing, on the other hand, offers predictability, and in the case of Basic Capital, even greater buying power than margin loans. With preferred equity, there are no surprise calls to liquidate your assets, and no shifting terms based on daily market movement. This makes it well-suited for long-term investments and a better fit for investors with lower risk tolerance.

Of course, preferred equity isn’t designed for speed. It lacks the flexibility of margin loans. You can’t instantly tap more funds or adjust your exposure the way you can with margin. Preferred equity financing requires more planning and is built for a longer investment horizon.

Is Basic Capital a margin loan?

Basic Capital isn’t a margin account. It’s not a loan. It’s an IRA paired with a financing structure based on preferred equity. It’s a new type of investment product that, in fact, has nothing to do with margin at all.

By structuring your Basic Capital strategically, we can offer the predictability of transparent financing costs and the security of limited liability. There are none of the risks of margin, no changes to terms based on stock price movements, no minimum margin requirements, and most importantly, less complexity for you as an investor.

Basic Capital adapts a tool traditionally reserved for corporate finance to empower everyday investors, helping them accelerate wealth-building and plan more effectively for retirement.

While the innovation is simple, it's understandably difficult for some to grasp. There has been—and will continue to be—skepticism about whether Basic Capital is just a margin account. It’s not. Some may question why strategies like these haven’t been scaled before.

Fortunately, we plan to be here for the long haul. We believe every American deserves greater buying power, greater ownership of the market, and that one way to achieve this is by creating more ways to harness the magic of compounding.