Margin Accounts

[Degen]

Ok I'm really new to all of this, so feel free to flame me if this is a bonehead question/post.


I wanted the ability to sell short, so I called my online broker and asked why I wasn't able to do this. They told me that I had to have margins activated in order for this to work.

Ok, so I applied for margins and got approved.


I'm reading the margin materials and it says you can use this to deal with short-term financial problems for personal or business use. I call in to inquire about this and I am told that for every dollar in my account, they will allow me to borrow one dollar at 9% interest. So essentially I am getting back the money that I put into the account. I can then buy stocks with the balance, which is really their money.



Ok so say I have $10,000 in my account. I pull it out and have $10,000 in cash and $10,000 to buy stocks with. Then I use that to open a new account, do the same thing and now I have $20,000 to buy stocks with and $10,000 in cash. Repeat, repeat, repeat.

Not that I would want to do this with my knowledge, but if one could beat the juice with their stock picking prowess...isn't this a way to exponentially grow your purchasing power with basically no capital of your own at work?

Am I missing something here?

[1C5]

I thought you get 4-1 margin on some online brokers.

[Degen]

according to the margin disclosure i have there is a law that says that there is some kind of a 50% rule...i thought this meant that you could only get 50 cents margin per dollar in there, but apparently that is 1-1.

though i could be wrong...

edit: o and i remember being taught in high school that a big cause of the great depression was that people were buying a ton of stock on credit, so they put restrictions on this

[ QUOTE ]
Ok so say I have $10,000 in my account. I pull it out and have $10,000 in cash and $10,000 to buy stocks with. Then I use that to open a new account, do the same thing and now I have $20,000 to buy stocks with and $10,000 in cash. Repeat, repeat, repeat.

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How do you pull out the money if you're using it for margin buys? I take it your plan would be to deposit 10k, get 10k on margin, buy 10k worth of stocks, and then withdraw 10k? If you do that, your broker will issue a margin call, which basically says, "You don't have enough capital in your account to cover your loans, so you have to sell whatever stocks you have right now to pay off the loans."

[DesertCat]

[ QUOTE ]
according to the margin disclosure i have there is a law that says that there is some kind of a 50% rule...i thought this meant that you could only get 50 cents margin per dollar in there, but apparently that is 1-1.

though i could be wrong...

edit: o and i remember being taught in high school that a big cause of the great depression was that people were buying a ton of stock on credit, so they put restrictions on this

[/ QUOTE ]

There are many stocks that have lower margin limits or no margin. I buy a lot of under $5 stocks, and they are pretty much not marginable. So if you want to fully use margin, you'll have to orient your investments towards higher priced stocks. Which might not be a bad thing.

But I highly recommend not using margin. Margin is leverage, which means it accelerates your gains, but also means your account can melt in a heartbeat. You can be smart and pick good stocks that go up, but margin can cause you to still lose money because of timing issues.

Real life example that cured my desire to use margin. I had always regretted selling some berkshire hathaway I owned about ten years ago and so I tracked the B shares looking for buying opportunities. In 1999 it fell back from previous highs of 2700 or so down to 2400, so I bought some. Then it fell down to 2100 and I bought more, all on margin. At 2000 even more.

BRK.B went into a sudden tailspin and dropped to the 1400 range, which triggered my margin call. At the time I didn't have much cash, so I ended up dumping all my shares for a loss. Within a year it was back up into the 2400 range and I would have had a nice profit. That's why margin calls are so terrible, they are always forcing you to sell something you thought was cheap, for even less. It's the ultimate "buy high, sell low" device.

Today I don't use margin at all. There might be some limited situations where it makes sense for a short period of time, but you are always taking some sort of risk.

[Sniper]

[ QUOTE ]
I'm reading the margin materials and it says you can use this to deal with short-term financial problems for personal or business use. I call in to inquire about this and I am told that for every dollar in my account, they will allow me to borrow one dollar at 9% interest. So essentially I am getting back the money that I put into the account. I can then buy stocks with the balance, which is really their money.

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Margin is great when you are right, it stinks when you are wrong. Yes, you can borrow, but be aware that the amount you can borrow constantly changes with the value of the equity in your account.

[ QUOTE ]
Ok so say I have $10,000 in my account. I pull it out and have $10,000 in cash and $10,000 to buy stocks with. Then I use that to open a new account, do the same thing and now I have $20,000 to buy stocks with and $10,000 in cash. Repeat, repeat, repeat.

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You can't actually take out the 10K, because your equity in the account would then be 0.

With 10K on margin, you can do...
Buy Stocks 20,000
Margin loan (10,000)
Total Equity is therefore 10,000

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Not that I would want to do this with my knowledge, but if one could beat the juice with their stock picking prowess...isn't this a way to exponentially grow your purchasing power with basically no capital of your own at work?

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Margin allows you to double your buying power. Over 25K and classified as pattern day trader, intraday you can do 4-1 open at any given moment, which is practically unlimited total buying power.

If you know what you are doing, margin (and other low cost loans) are a great thing!