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With the recent events at MF Global, I am reluctant to keep any more than a minimum of cash at any brokerage; it seems that in the cases of fraud, you either don't get your money back or it may take years before you do get it back.

So my question is this (for investors who have tried it): if I keep a minimal amount of cash at a brokerage and keep the rest in a liquid external cash account, typically, what net percentage margin fee can I expect to pay at a typical brokerage per year (margin interest - interest earned on cash elsewhere)?

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You're trying to mitigate the risk of having your investments wiped out by fraud committed by your broker by using margin loans to buy stock secured by other, non-cash assets in your account.

The solution that you are proposing does not make any sense at all. You mitigate a very low probability/high impact risk by doing something that comes with a high probability/medium impact risk.

In addition to interest costs, holding stocks on margin subjects you to the very real risk of being forced to sell assets at inopportune times to meet margin calls. Given the volatility that the markets are experiencing in 2011, there is a high risk that some irrational decision in Greece could wipe you out.

If I were worried about this, I would:

  • Use a broker that allows you to sweep cash into a FDIC insured bank accounts. TD Ameritrade and Charles Schwab are examples of brokers who does this many other do as well.
  • Transfer cash holdings in excess of FDIC limits that are not needed for immediate investments to TreasuryDirect and buy Treasury bills or notes.
  • Diversify your holdings with multiple brokers to the extent practical.

If you have enough money that SIPC protection limits are an issue, you desperately need a financial adviser. Do not implement any strategy involving margin loans until you talk to a qualified adviser.

  • (Obsolete comment (I can't delete it right now)) – jprete Nov 4 '11 at 18:57
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Losses at a brokerage firm due to fraud are insured up to $500,000 per account for securities by the SIPC (Securities Investors' Protection Corporation), which is the stock market version of the FDIC (that insures deposits). The protection amount for cash is $250,000.

That's small comfort to "big" players in MF Global. But it does protect "small" investors like you.

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