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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,...
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 ...
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.
8
My gut is to say that any time there seems to be easy money to be made, the opportunity would fade as everyone jumped on it.
Let me ask you - why do you think these stocks are priced to yield 7-9%? The DVY yields 3.41% as of Aug 30,'12.
The high yielding stocks you discovered may very well be hidden gems. Or they may need to reduce their dividends and ...
8
A derivative contract can be an option, and you can take a short (sell) position , much the same way you would in a stock. When BUYING options you risk only the money you put in. However when selling naked(you don't have the securities or cash to cover all potential losses) options, you are borrowing. Brokers force you to maintain a required amount of cash ...
8
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
Selling short in brokerage accounts doesn't work that way for the regular client.
Ask your broker what it will cost you to short the treasury if you remove the cash you think you'll get. You will probably wind up showing money borrowed and charged margin instead of the credit you expect.
If your proposal worked, anyone can short in their brokerage ...
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.
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 ...
6
Probably the most significant difference is the Damocles Sword hanging over your head, the Margin Call.
In a nutshell, the lender (your broker) is going to require you to have a certain amount of assets in your account relative to your outstanding loan balance. The minimum ratio of liquid funds in the account to the loan is regulated in the US at 50% for ...
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
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
With margin accounts you will be able to use the proceeds from a closed trade INSTANTLY. Without margin accounts this is the time you close the trade + 3 business days for clearing. In practice this means 4-5 days if there is a weekend or holiday involved between those 3 business days. This ties up your capital for an unfavorable amount of time, where as a ...
5
Every dollar you invest in paying off your loans earns you a guaranteed rate of return of 10-15%, whatever the loan rate is. Forget margin, which is still debt and only lets you cash a portion of your total equity. (You can't possibly pull $24k in cash from an account with only $12k in portfolio value.)
Liquidate your brokerage portfolio. Use every ...
5
Paying off your student loan is an investment, and a completely risk-free one. Every payment of your loan is a purchase of debt at the interest rate of the loan.
It would be extremely unusual to be able to find a CD, bond or other low-risk play at a better rate. Any investment in a risky asset such as stocks is just leveraging up your personal balance ...
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 ...
4
The most obvious use of a collateral is as a risk buffer. Just as when you borrow money to buy a house and the bank uses the house as a collateral, so when people borrow money to loan financial instruments (or as is more accurate, gain leverage) the lender keeps a percentage of that (or an equivalent instrument) as a collateral. In the event that the ...
4
There is no standard answer to this question. It will depend entirely on what kind of options activities your broker offers and what your broker has approved your specific account for. Consider:
Most brokerage accounts, by default, don't permit options trading at all. You typically need to ask/apply for it.
Even with options trading, many brokers, by ...
4
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 ...
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 ...
4
There is no margin call.
Inverse ETFs use derivatives that would lose value in the case you describe though this doesn't force a margin call as you may be misunderstanding how these funds are constructed.
4
The initial margin is $5940 and maintenance margin $5400.
A simple search of Comex Gold Margin gives the CME group site. You then need to specify CMX metals to see the margins.
Gold is currently about $1300. A gold future is 100 oz. So the full contract is worth $130K. You want to 'go long' so you enter into a contract for Dec '14. You put up $5940, and ...
4
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? It's time to get back to work.
The only case where the broker might extend this to you is if you had demonstrated success as a trader; such as a ...
4
Your question is based on a lack of understanding of margin (I'm assuming that you're talking about the U.S.). Let's start with the margin requirement.
If you want to buy shares on margin, under Reg T, the FRB requires 50% of the value of the purchase (brokers can require more). So if you want to buy 100 shares of a $10 stock on full margin then the ...
3
The key word you forgot to include from Slide 29 is:
Free-Riding
Investopedia defines free-riding as:
In the context of a brokerage firm, a free rider problem refers to a situation where a client has been allowed to purchase shares without actually paying for them, and then subsequently sells the shares (ideally for profit).
The problem with this ...
3
Here is another explanation of an SMA.
SMA refers to the Special Memorandum Account which represents neither equity nor cash but rather a line of credit created when the market value of securities in a Reg. T margin account increase in value. For example, assume the market value of securities purchased at a cost of $10,000 on margin (at 50%) increase in ...
3
The broker will charge borrowing fees and sometimes a charge called "hard-to-borrow fee".
Other than that you will earn interest on the cash you get from selling the stocks, but you will have to pay dividends. This is because someone else (the party you sold the stocks off to) will now get the dividends and the party who lent you the stocks will miss out ...
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