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How is one able to add diversity to one's Robinhood portfolio while utilizing near 100% of Gold (margin)?

I was told in my previous post, as well as reiterated by a Robinhood Rep, that when making a purchase, cash is used first and then margin.


Scenario: We have 5K cash and 5K margin and would like to buy stocks ABC (5K) and XYZ (5K), each of which has the lowest possible "initial requirement" of 50%.

When we purchase 5K of ABC, the purchase will consume our 5K cash and leave us with 5K margin (now useless to make purchase of XYZ, since 50% initial requirement).


How do we use 100% of margin if we want to hold 2 or more positions?

Maybe this scenario is a good reason to diversify brokers or manage a second Robinhood account for my wife?


From Robinhood Rep:

In your scenario, yes you would be correct as you would have $5k in Gold left with no cash so you would be unable to use 100% of Gold to purchase any stock.

  • I don't understand. Why can't you purchase 5k of XYZ after you purchase 5k of ABC? – Nosrac Mar 14 '18 at 18:03
  • @Nosrac Me neither, but it seems to be the case. – Dustin Mar 14 '18 at 18:13
  • You can buy $5k of each stock with $5k of cash. See my answer below. – Bob Baerker Mar 14 '18 at 18:28
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    ok @quid I see what you're saying. "robinhood" specifically (you're pointing out) has some further restrictions (for their "gold" rofl product). Gotchya - great point. – Fattie Mar 14 '18 at 21:54
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    @Fattie, this is one of the reason I don't like, or really trust, these no fee start-up brokers. "Gold" is kind of margin, sort of. There's no fee if, but. Notwithstanding the obvious rational flaw of single stock margin trading a $5,000 account... – quid Mar 14 '18 at 22:03
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Reg T sets margin borrowing at 50% so if you want to buy $10k worth of stock, you must put up $5k and the broker loans you $5k. There are various formulas involved:

Buying Power = Cash Available/Margin Pct = $5k / 50% = $10k

Market Value - Debit Balance = Equity

so

$10k = Market Value

$ 5k = Debit

$ 5k = Equity

This satisfies the initial margin requirement --> $10k / $5k = 50%


You can use fully paid securities for collateral as well. Suppose you own $5k worth of stock.

$5k = Market Value

$ 0 = Debit

$ 5k = Equity

The formula for determining Buying Power is:

Securities deposit = (Purchase Amount x Margin%)/(100% - Margin%) = ($5k x 50%) / 50% = $5k

So you can buy another $5k of stock if you have $5k of fully paid securities

The position now looks like this:

$5k +$5k (two stocks) = Market Value = $10k

$ 5k = Debit

$ 5k = Equity

which is identical to the first scenario where $5k of cash was deposited

  • which all makes sense to me...i was surprised when Robinhood Rep said remaining couldn't be used...maybe their wording was misinterpreted by me. I will send another email to verify. just don't want to do anything to restrict my account or allow them to "sell my stock" other than margin maintenance which i understand. – Dustin Mar 14 '18 at 19:40
  • I would guess that the rep didn't know what he was talking about. From what I read some time ago, Robinhood offers 50% margin but they reduce it if it is a higher volatility stock. As you indicated, the best thing to do is contact them and ask them for details. – Bob Baerker Mar 14 '18 at 21:18
  • I've received confirmation from Robinhood. The posted Rep response was INCORRECT. – Dustin Mar 15 '18 at 14:40
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    Surprise, surprise. You pay peanuts, you get monkeys. ;->) – Bob Baerker Mar 15 '18 at 14:50
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    50% is good. While you have "yet to pay a single dime in commissions nor margin costs", you're paying a monthly fee for that margin. If you are fully margined all month long, they're competitive. If not, not so much. I don't know it for a fact but I have read that RH routes orders for PFOF (payment for order flow) which means that they send orders to market makers willing to pay for orders. That doesn't always result in the best price fills. I get it. If you have limited funds then RH is a good way to go. Just remember to CYA when using margin borrowing ;->) – Bob Baerker Mar 15 '18 at 16:07
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Buy $5000 of stock "A".

That will then go down in market price, to say $4400.

You can actually use that amount (ie, $4400 - or whatever it is priced at on a given day) as a margin calculation.

So they loan you 4400 on margin.

So, they'd let you buy another $4400 of stock. In company B for example.

Let's say the next day company B happens to go down from $4400 to $4000, and company A goes down from 4400 to 4000.

You now have $8000 of stock. You're forced to sell it due to the swing, so you get 7900 (less all the fees) and they instantly take the 4400 you borrowed on margin.

You now have 3500, so you turned 5000 into 3500 in three days.

  • Your answer has multiple problems. Margin had nothing to do with stock "A" dropping from $5,000 to $4,000. Lumping that market loss into a discussion of margin is misleading. The use of margin only caused a $400 loss. Second, the days of $100 in fees for 4 trades are long gone, more so since this is Robinhood who charges no commissions. Third, you are not forced to sell the stocks when they drop to a total value of $8,000 since FINRA sets the margin maintenance level at 25%. So yes, the allowable "swing' is 75% unless the broker sets more stringent requirements. – Bob Baerker Mar 14 '18 at 21:15
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    @BobBaerker, (I think they do have more stringent requirements than that), but fair enough. "Lumping that market loss into a discussion of margin is misleading." Huh? You trade right, I think you misread or something. If you have $5k of stocks, and they drop 10%, you lose $500 of your $5k. If you have $10k of stocks on margin (from $5k) and they drop 10%, you lose $1000 of your $5k. " Lumping that market loss into a discussion of margin is misleading." Cannot comprehend your sentence, the overwhelming quality of margin trading is you lose money twice as fast when prices go down! – Fattie Mar 14 '18 at 21:48
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    The only salient fact anyone needs to know about margin trading is that: you lose money twice as fast when prices go down - heh! {And indeed, as you know .. if you get a 50% gain from a base, a 30% loss can wipe that out. But if you get a 50% loss from a base, you need a double to get back where you were.} Sorry if misunderstood you. – Fattie Mar 14 '18 at 21:51
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    certainly a heated topic, men! time for whisky .. – Fattie Mar 14 '18 at 22:22
  • RH's low volatility stocks have (50% initial req., 25% margin maintenance). High volatility stocks (68%/60%). And yes using margin amplifies losses & wins. Also if a stock drops 10%, it does not necessarily realize as a loss unless I sell. My question is about how RH's Gold works for purchasing, not the implications of using margin on wins/losses. – Dustin Mar 14 '18 at 22:42

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