41
Are you prepared to meet margin calls?
If the value of your holding falls enough that you drop below the minimum maintenance margin, the broker can demand that you add additional assets to bring your account back over the maintenance margin. If you can't meet their demand, they can force a sale of your holdings.
In other words, if you are buying on margin,...
24
Credit scores are not completely transparent, but when I look at my score there's no mention of the magnitude of any events. Truthfully I have no bad events but the only indication is a count (0), not any indication of size.
A bad event is a bad event. It doesn't matter if it's a $10 default or a $10,000 default - it gets reported the same way from what I ...
21
Well one thing you seemed to not have considered, basing your returns purely on past average returns over 30 years, is that if there is a downturn within your 5 years or so of investing, you may not only not recover your investment returns but you will be getting charged interest as well.
Don't get me wrong, if you think you can take advantage of margin to ...
20
Just open another bank account with a different institution.
Walk in, sit down, leave with a new bank account and routing number. (You may be able to do this online with some institutions, but either way you need to fund the new account with some money you already have.)
Connect it to your brokerage account. Initiate a transfer of money that covers the ...
17
To put it very simply, a 10X leverage means that if your asset drops 10% you have lost 100% of your money.
ABC (whatever the target asset) trades at 10,000. If you only put up 1,000, a 10% drop wipes you out. A 10% rise doubles your bet.
At 9,500 you've only lost half your money. The percent loss is literally multiplied by 10.
To put it in a formulaic ...
answered Aug 1 at 11:45
12
With margin you always owe what you borrowed. The gain or loss is all yours. To buy $20,000 worth of Bitcoin you supplied $2000 and borrowed $18,000. The Bitcoin is now worth $19,000 and you still owe $18,000. The Bitcoin lost $1000 worth of value total so you now have $1000 less than you started with.
Note most brokerages won't allow you to have such high ...
11
Are there factors I haven't considered?
Margin calls.
Your reasoning is all very logical. The issue is when (not if, when) your investment drops such that some needs to be sold or you need to wire in more money. Looking at long period averages is all well and good. Living through the volatility is a lot different, and margin calls are real.
11
10x leverage means your profits are 10 times more and your losses are 10 times more.
So imagine what your profit or loss would have been if you didn't have any leverage.
If you would have made $100 profit, then with 10x leverage, you've made $1000 profit.
If you would have taken a $100 loss, then with 10x leverage, it actually ends up being a $1000 loss.
...
11
A margin account is effectively debt that is secured against your investments. In general, debt is the cheapest when it is secured against your assets [ie: the lender has the legal right to liquidate your assets to cover off your debt, if you are unable to make payments].
For many people, the most common form of secured debt is a mortgage secured against ...
9
They will make money from brokerage as usual and also from the interest they charge you for lending you the money for you to buy your shares on margin. In other words you will be paying interest on the $30,000 you borrowed from your broker.
Also, as per Chris's comment, if you are shorting securities through your margin account, your broker would charge you ...
8
In a sense, margin leverages losses more than gains. This is related to the dreaded margin call. If you invest with 2x leverage, and your stocks fall 25%, you will be forced to liquidate with a loss of 50%. Your wealth has been cut in half. Even if you start over again with 2x leverage, you now need a 50% gain in your stocks to get back to even (ignoring ...
7
The spread is two trades, one of which opens up some risk one of which limits/cancels the risk. There is nothing stopping you from selling part of the spread opening the door to the risk. You're required to have a margin account to open risky positions, even if the specific spread trade you're attempting to open has a risk limiting/cancelling counterpart.
7
Put more money into the account. You have to demonstrate that you have the cash to back your bets.
If you don't have the money, and you're unemployed, then what are you doing messing around with a margin account?
The only case where the broker might extend this to you is if you had demonstrated success as a trader; such as a 10% profit for the last 5 years, ...
7
You're conflating several issues and assuming that one is better than the other. OK, one by one:
The daily interest cost is the borrow rate times the price of the stock. Perhaps yesterday, GME's borrow rate was 40%. At today's close of $325, that's $35.62 per day which projects to $13k per year. Note that the borrow rate and security price vary so the $...
7
The losses may be $5 billion but it's possible that not all of the losses have been realized and some of it is still on paper (some of the short positions are still open) - likely ones added later on during the short squeeze).
It's possible that there are options in the mix, allowing someone to maintain losing open positions while not totally losing their ...
7
Although margin trading and short selling have in common the concept of borrowing something, they are distinct trading concepts with vastly different outcomes and risk profiles — primarily because the former facilitates a buy, and the latter facilitates a short sale.
When you borrow funds from your broker to buy shares, you end up with a long position and ...
6
Yes.
I heard back from a couple brokerages that gave detailed responses. Specifically:
In a Margin account, there are no SEC trade settlement rules, which means there is no risk of any free ride violations.
The SEC has a FAQ page on free-riding, which states that it applies specifically to cash accounts. This led me to dig up the text on Regulation T ...
6
Margin interest is deductible on Sch A. So my first warning is that if you don't itemize, the deduction is lost.
Assuming you already itemize, it adds to your itemized deductions. If your gains are short term, they are taxed at your regular rate, i.e. your marginal rate same as earned income. If your return is higher than the margin rate, you are in the ...
answered Nov 22 '13 at 20:09
6
It is a question of how volatile the stock is perceived to be, its beta correlation to the S&P500 or other index.
Margin requirements are derived from the Federal Reserve, Self Regulatory Organizations, the exchange itself, the broker you use, and which margining system you are using.
So that makes this a loaded question.
There are at least three ...
5
Your broker will charge you commissions and debit interest on your "overdraft" of $30,000. However it is very likely that your contract with the broker also contains a rehypothecation clause which allows your broker to use your assets. Typically, with a debt of $30,000, they would probably be entitled to use $45-60,000 of your stocks.
In short, that means ...
5
The broker would give you a margin call and get you to deposit more funds into your account. They wouldn't wait for the stock price to reach $30, but would take this action much earlier.
More over it is very unrealistic for any stock to go up 275% over a few hours, and if the stock was this volatile the broker would be asking for a higher margin to start ...
5
Margin is a double edged sword. On 50% margin, it's twice as good to the upside and twice as bad to the downside. To succeed with it, you need several ingredients.
First and foremost, you need a plan. Perhaps more importantly, you need the ability to practice disciplined risk management because there will come a day when it will hit the fan. It will ...
5
If the short leg is assigned early, the broker cannot immediately exercise the other leg, because the assignment notification process occurs overnight. The offsetting exercise obtains the needed cash or stock, but only the trading day after it was needed, incurring one day's interest. See this question.
5
Your question assumes that eventually "the price goes back to normal". There is no guarantee that will happen. Short sellers have experienced large losses but also an increase in the risk of further losses, as the stock has become extremely volatile.
What was originally a $1 million short position, for example, may have become a $20 million short ...
5
If a company sees increased demand and can handle it with existing employees, capital and expenses, then it certainly has increased its efficiency (the same resources are producing more revenue). Thus the higher operating margin correctly reflects higher efficiency.
5
ANY unpaid debt is negative for your credit. That being said, there are so many different scoring models, even by the same bureau, that it's virtually impossible to assess the consequences. Some might place more emphasis on small unpaid debts relative to larger ones, others may look at installment debt default as more serious than auto debt default or ...
4
With your numbers, look at it this way - You borrowed $50. When the stock is $100, you are at 50% margin.
What's most important, is that there's margin interest charged, so the amount owed will increase regardless of the stock price. When calculating your return or loss, the interest has to be accounted for or your numbers will be wrong. For a small ...
answered Feb 19 '14 at 16:30
Only top voted, non community-wiki answers of a minimum length are eligible