Trading on Margin

My broker offered to set me up with a margin account. It seems like a bad deal to me, but I don't know if it can be a successful short term strategy. Does anyone have any advice, or any experience successfully trading on margin accounts?

Thanks!

 

A margin account has no negative effect on you, other than the broker can lend your shares out. But that doesnt matter really because the broker has many margin clients and some are bound to have those same shares. What advantage margin gives you is buying power. While the buying power is not free the interest rates are genearlly pretty decent. You can get caught with your pants down if you dont know what your doing but there is no harm done in having a margin account. You do not have to use the margin if you dont want to it just gives you oppertunities in the future to broaden your trading horizion.

Follow the shit your fellow monkeys say @shitWSOsays Life is hard, it's even harder when you're stupid - John Wayne
 

There isn't any disadvantage if you don't let it become one. I (as I'm sure a lot of monkeys in training) have been hit with a margin call along the way. It is painful, but if you don't take positions on margin it at a minimum lets you trade before your cash settles.

So if you can handle it, definitely convert. Leverage works both ways..

 

In your case, margins is one of the best things that happened to you(trading wise), since youve made 140% over 3 months.

All this means is that if your broker lends you 100% of what you have, you would have made 280% in 3 months.

The greatest adv, as someone mentioned above, is that you can trade as you like, you dont have to wait 3 days for your trades to settle. Just be careful in days like today, when theres a total bloodbath in the market, you would make double losses if you are on the wrong side of the trade.

 

Heister, clearly you've never seen a marginable account go from having an initial margin call of 2.3 million dollars to having a margin call of 8 Million due in the span of 3 days thanks to the market moving. The same holds true with having a very concentrated position that you are using for a margin loan and it drops. There is always a negative effect to be had. The market crash in 2008 should be a clear example of that one. However, there is some good stuff... but here's a little clarity.

First of all, MS, I'm sure you understand the basics of how Margin works. You put up assets in a portfolio as collateral to borrow against them. You can borrow up to a certain percentage against each individual position in your portfolio. Depending on your broker, your haircut against each security in your porfolio will be different. At my shop, it follows the following:

Stock Price It's marginable, but you get no benefit from using it $3 = You can borrow up 7 >=Stock Price - 3 >0 against the value of the stock $10 You can borrow up to %65 percent of the stock's value.

On the flipside, in relation to how much you can borrow, you must keep 100%, $3 and 35% of the value of the stock you are margining in order to satisfy the maintence requirements. This creates leverage. There is nothing inherently good or bad about using leverage, but you can now lever your portfolio to do certain kinds of trading. Options Trading and Short Sales require the use of margin. The numbers above are dependant on your broker, as everyone is different. Bonds also have a different haircut than equities. Certain securities are also just not marginable. One big thing to note is that when you buy on margin, you need to pay half the value of the purchase in either cash or against your drawing power on margin as an initial margin requirement. Once the stock settles, you are required to handle the maintenence requirement.

In order to understand margin and it's effects you also need to undertsand how equities are settled. Equities are settled in one of a few ways. Every firm does it slightly differently, but at my shop type 1 is Cash meaning you pay for the shares outright. Type 2 is margin, meaning you are purchasing them with borrowed funds and type 3, which is the "short" account. Certain types of trades can only be settled in a Margin account (type 2) or a Short account (type 3). What having a margin account does it is it allows you to execute trades that are either short or can be paid or collateralized with using borrowed funds. Options trading in particular requires you to have access to margin. Any stock you don't buy with cash outright will be held in a margin account. Same thing goes with options. Certain options will be held in Type 2 while others will be held in Type 3. This is important, as your overall marginability depends on this.

Monkey, I assume you're not trading options here, so that's irrelevent at the moment, but your concern should be what happens if I make use of the leverage and my porfolio drops in value to the point where I break the Reg T 25% Collateral requirement, or whatever mark your broker has set. That means when you get your margin call, you have 3 days to clear it up. Either you sell out shares of your portfolio or you bring in cash to cover it. Here's the kicker, remember what I said about the collateral. Well, when you sell your stocks to cover, you only free up the collateralized portion. So on that $100/Share stock you own, you can only use $35 of the net proceeds to cover your margin call.

That said, MacSync made a good point about using Margin to cover a trade if you are doing a same day sale or are bringing in cash to cover something. That is important if you are executing trades on the same day, however from a settlement point of view, it doesn't matter if the trades even out in the end or if the sale provides more than enough capital to cover, trades settling on the same day does not equate to a proper settlement, and as a result, you are still required to book the position you just opened into type 2.

 
Frieds:
Heister, clearly you've never seen a marginable account go from having an initial margin call of 2.3 million dollars to having a margin call of 8 Million due in the span of 3 days thanks to the market moving. The same holds true with having a very concentrated position that you are using for a margin loan and it drops. There is always a negative effect to be had. The market crash in 2008 should be a clear example of that one. However, there is some good stuff... but here's a little clarity.

First of all, MS, I'm sure you understand the basics of how Margin works. You put up assets in a portfolio as collateral to borrow against them. You can borrow up to a certain percentage against each individual position in your portfolio. Depending on your broker, your haircut against each security in your porfolio will be different. At my shop, it follows the following:

Stock Price It's marginable, but you get no benefit from using it $3 = You can borrow up 7 >=Stock Price - 3 >0 against the value of the stock $10 You can borrow up to %65 percent of the stock's value.

On the flipside, in relation to how much you can borrow, you must keep 100%, $3 and 35% of the value of the stock you are margining in order to satisfy the maintence requirements. This creates leverage. There is nothing inherently good or bad about using leverage, but you can now lever your portfolio to do certain kinds of trading. Options Trading and Short Sales require the use of margin. The numbers above are dependant on your broker, as everyone is different. Bonds also have a different haircut than equities. Certain securities are also just not marginable. One big thing to note is that when you buy on margin, you need to pay half the value of the purchase in either cash or against your drawing power on margin as an initial margin requirement. Once the stock settles, you are required to handle the maintenence requirement.

In order to understand margin and it's effects you also need to undertsand how equities are settled. Equities are settled in one of a few ways. Every firm does it slightly differently, but at my shop type 1 is Cash meaning you pay for the shares outright. Type 2 is margin, meaning you are purchasing them with borrowed funds and type 3, which is the "short" account. Certain types of trades can only be settled in a Margin account (type 2) or a Short account (type 3). What having a margin account does it is it allows you to execute trades that are either short or can be paid or collateralized with using borrowed funds. Options trading in particular requires you to have access to margin. Any stock you don't buy with cash outright will be held in a margin account. Same thing goes with options. Certain options will be held in Type 2 while others will be held in Type 3. This is important, as your overall marginability depends on this.

Monkey, I assume you're not trading options here, so that's irrelevent at the moment, but your concern should be what happens if I make use of the leverage and my porfolio drops in value to the point where I break the Reg T 25% Collateral requirement, or whatever mark your broker has set. That means when you get your margin call, you have 3 days to clear it up. Either you sell out shares of your portfolio or you bring in cash to cover it. Here's the kicker, remember what I said about the collateral. Well, when you sell your stocks to cover, you only free up the collateralized portion. So on that $100/Share stock you own, you can only use $35 of the net proceeds to cover your margin call.

That said, MacSync made a good point about using Margin to cover a trade if you are doing a same day sale or are bringing in cash to cover something. That is important if you are executing trades on the same day, however from a settlement point of view, it doesn't matter if the trades even out in the end or if the sale provides more than enough capital to cover, trades settling on the same day does not equate to a proper settlement, and as a result, you are still required to book the position you just opened into type 2.

He was asking about a margin account, not using margin. So yes what I said is 100% correct. The margin account has no bering on him directly unless he uses margin. He said the account itself seemed like a bad idea which is not true. What is bad is the use of margin by people who do not understand how margin calls work. But, just because you dont know how to use margin doesnt mean that having a margin account is a bad idea. Things like options require that you have a margin account. So I was saying that margin accounts are not a bad thing.

Follow the shit your fellow monkeys say @shitWSOsays Life is hard, it's even harder when you're stupid - John Wayne
 
Best Response

Maybe it's because I come from a very different school of thought, but if you don't understand it to begin with or don't think you have a need for it, you don't ask for it or open up a margin account on the recommendation of your broker. The reason why there is a negative side to it is that you have essentially given someone the ability to create a line of credit versus a pool of assets held as collateral. Clearly you're implying that everyone understands how margin works. People are stupid. Unless you have time to do the research yourself or understand what you are looking at before using leverage, giving someone the ability to use leverage does not necessarily work out for the better. You are giving someone access to a loan that they may not need and shouldn't necessarily be using. I know people who were burned by margin since they didn't know what it was and I know pros who were burned by it because a trade went the wrong way and they were over levered.

So if I get this right then, you're advocating for him to have a margin account regardless of whether he uses it or not despite the fact that, by opening up the margin account, he now has access to a new line of credit to draw against that is collateralized versus his portfolio whether he wants to or not. Even worse, if he does draw on it, he is now bound by the requirements for margin. IF you don't know how to use it or do not think it will help, don't bother opening it.

And no, a broker cannot lend out shares in from account that has marginable securities unless they are held in type 2.

 

Im not advocating either way, I am just stating that the margin account itself is not in of it self an evil. I totally agree with you about advocating caution.

Follow the shit your fellow monkeys say @shitWSOsays Life is hard, it's even harder when you're stupid - John Wayne
 

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