Margin Account

Have you tried availing a margin account from your stockbroker? What percentage of your equity are you willing to risk with the margin account? 20%? 10%?

Tags: account, margin, stocks

One Response to “Margin Account”

1. Carlos says:

   February 19, 2013 at 2:38 pm

   Hi jon9v,

   I haven’t used it, but since you haven;t gotten an answer so far, I’ll share what little I know about it.

   From what I understand, margin call is like getting a cash advance – they give you money, and you use it to buy stocks. So it is basically a loan.

   So the question then becomes how much debt you are willing to take on for a risk (stocks/equities investment). To answer that here are a few basic scenarios and my thoughts on them.

   1. I’ve got a hot tip OR My stock went down and I want to average down some more OR I’m gonna use Other People’s Money (the margin call) for my stock, to increase my “war chest” because the bigger the fund, the more chances to succeed.

   My thoughts: Epic fail in the making. Unless I’m betting on a sure thing (and there is none) you’re probably burying myself with this approach. Taking out a debt is either a necessity (no more money for food or nothing to pay the remaining hospital bill after borrowing money from all my relatives) OR to finance an opportunity to make money (starting a business or other money making endeavor).

   Stocks look like they are an “opportunity” but they aren’t. Stocks don’t make money, they just appreciate in value. It’s almost the same thing, except you can’t make it appreciate in value. In a business you can work harder, or market/advertise better or lower prices, streamline costs – any number of things to turn a profit. With stocks, you;re just waiting for the right roll of the dice.

   2. I’ve got 100K in stock AAA. It’s up 100%. I’ve got no more money. I’m gonna borrow 50k and bet it on AAA again.

   This is the approach of veteran and risk-inclined stock traders. Their reasoning: I’ve got 100K in pure profit right now. Should it shockingly fall 50% (which is unheard of), I’ve still got my entire capital intact. but should it appreciate even a little I get more profit in terms of the actual amount I will be receiving at cash out. Plus if this is a bull market, or the stock is on a bull run, I might be making enough to let the loan pay of itself.

   Is that wrong? Well, it’s extremely risky. Objectively speaking, given the right scenario, there might be more reward than risk in the equation. But that doesn’t mean the risk is small.

   I’ll never advise anyone to do this, but I myself might be tempted given extremely favorable scenarios.

   3. The in between scenario – I’m up 20% to 120K, I feel good about it. I’ll take a 20K margin call and place it in my stock.

   What if it goes down 10%? or even 5%?

   The profits were just enough to pay of the loan principal. After losing 5% I have to sell part of my “war chest” to pay off a loan I was hoping to make money off.

   Sure it could go up. But how much would it have to go up before it adds to my profits instead of just eating it?

   It’s not a bad thing to take advantage of a margin call, it’s just a very high-risk, high-reward option.