Do any of you do it, or do you think it’s too risky, or do you not want to pay the interest expense?
We talk about dollar amounts for fulfilling the “initial margin” requirement. However, it’s unclear to me what exact options investors have in fulfilling that requirement. I know it’s not just cash. But i’m unsure whether initial margin requirements can be met by
A) super marketable and liquid securities like treausury bills and notes and CDs
B) marketable securites (common stock of other companies)
trading on margin is part of risk management. It can be used to increase or reduce risk. there is something called ‘portfolio margin’ which describes both a and b. The best broker is Interactive Brokers and they require 100k to offer portfolio margin which may be a regulatory requirement.
as i’m young and most assets are illiquid, i use line of credit debt to buy on margin to effectively achieve a 100% on margin trade. when this works, it’s awesome b/c your rate of return is infinity. that said, this is only useful for swing trades. i wouldn’t do this to buy and hold. buying on margin and using a buy and hold strategy is for suckers, unless you initiate the trade after the market is down 50%.
yep alpha is right. lowest comission. best margin rates. and if you have over 100k the $10 monthly fee is waived. B4ng3rs. as far as leveraging though, dont do it, not at this late in a cycle. cycles are typically 7 to 10 years on average. then bam bear market.
i’ve never heard of this… in Canada, buying stocks using a LoC is very typical. I don’t see how the law would prevent you from borrowing from the line to make a trade, whether on margin or not. you could just say “i used my line to pay for all of my expenses of the last 6 months and used all of my salary to fund the trade”. worst case scenario, if your bank doesn’t like your use of funds, it calls the loan and you find a loan elsewhere, but it won’t call the loan unless you are already a risk to the bank’s business (i.e. you’re ghetto).
that said, historically, borrowing from an unsecured line of credit is typically too expensive to make trading worthwhile. at today’s current rate (mine is 3.84%), it is a very low hurdle rate, especially considering i can write the interest off if the investment pays a dividend.
Buying from a line of credit that you get elsewhere (i.e. not from your broker) seems unlikely to be illegal. It is, however financially dangerous if you don’t know what you’re doing. If your broker doesn’t offer you portfolio margin, this can be a way to do it yourself, but often the interest rates are too high to make this a good idea.
If you’re borrowing from an external line of credit to simulate portfolio margin for yourself, that’s ok (assuming that you your portfolio is properly balanced, riskwise), but it’s dangerously easy to convince oneself to use those funds for naked leverage, which can be a disaster if you are unlucky enough to make a wrong call.