Advance rate versus market value

Market value is what your shares are worth. The advance rate is how much of that the lender will count.

Two numbers describe the same holding, and they are almost never equal. The first is market value: the price the market last paid, times the number of shares. That number is public and objective. The second is lending value: what the lender is willing to lend against, which is market value multiplied by an advance rate.

An advance rate is a percentage assigned by asset type. Large-company stock might carry 50 to 70 percent. A broad bond fund might carry 80 percent or more. A thinly traded small company might carry 25 percent, or zero — meaning it counts for nothing at all even though it is worth real money.

lending value = market value × advance rate

lending value: The only collateral figure the lender's system cares about.
market value: Shares times last price. Public, objective, and not the operative number.
advance rate: A percentage the lender assigns by asset type and revises at its discretion.

The gap matters because everything downstream is computed on lending value. Your capacity, your headroom, and the trigger for a call are all measured against the discounted figure, not the one you see in your brokerage app. Two people with identical million-dollar portfolios can have wildly different borrowing capacity if one holds an index fund and the other holds a single volatile name.

One more thing to notice: an advance rate is a policy, not a contract term fixed for the life of the loan. It is assigned by the lender and can be revised by the lender. That is the subject of a later lesson, but it belongs in your head from the start.

Key terms

Market value: Shares held multiplied by the current market price. Objective and publicly observable.
Advance rate: The percentage of an asset's market value a lender will count as collateral. Also called a loan value factor.
Lending value: Market value after applying advance rates. The number the lender's risk system actually uses. Often called collateral value.

Worked example

Same market value, very different capacity

Two accounts, each worth $1,000,000 at today's close.

Account A — broad index fund: $1,000,000 × 70% = $700,000
Account B — one mid-cap stock: $1,000,000 × 35% = $350,000
Difference in lending value: $350,000
What the app shows both people: $1,000,000

The screen you look at and the number the lender runs on are different numbers. Only one of them triggers a call.

Check yourself

A portfolio has a market value of $800,000 and a blended advance rate of 60%. What is its lending value, and which figure governs a margin call?

Saved in this browser only. No account, nothing sent anywhere.

Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.