Margin Accounts and Money

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frankrom
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Margin Accounts and Money

Post by frankrom »

Hey Guys,

How do you all feel about margin accounts and using margin money?

Generally speaking borrowing on margin to buy a similar asset that generated the margin room would be a risky idea wouldn't it?

Because if the price drops you lose value on the holdings and also the margin room... it is a double hit... where as buying a completely different asset prevents the double gains and double downs...

Thoughts?
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kcowan
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Re: Margin Accounts and Money

Post by kcowan »

I think margin money is handiest for making a purchase before you have more permanent money available. Much better to use a HELOC than margin for both the rate charged and the double hit as you mention.

It is also useful for day trading.
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Re: Margin Accounts and Money

Post by Peculiar_Investor »

The OP might want to read our wiki article(s), Margin - finiki, the Canadian financial wiki and Margin account. The Further Reading sections provide links back to previous FWF topics on the matter, thus saving the efforts to search for them.
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Re: Margin Accounts and Money

Post by MrMike »

I maxed my HELOC to invest at 2.95% interest. Then while I waited for the increase to kick in, I used margin on Questrade and they charged me 6%!!! I couldn't believe it was that high. I was making 12% return so it was still good but they were taking half my dividends. Once the HELOC increase kicked in, I quickly paid Questrade back. My new interest was 2.65% because it was for a larger amount.
YouTube - Investing with Leverage Video Series - I borrowed money to invest and wanted to document the steps and process. Hope you enjoy and find the information useful.
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Re: Margin Accounts and Money

Post by SQRT »

If you have large balances in your account and are generally a good banking/broker customer you can negotiate margin loan rates to as low as prime, currently 2.45%. If you do this the margin interest will often be lower than the dividends you would receive on stock you purchased. I think this is a particularly low risk strategy especially if you only borrow in the range of 20-25% of the market value of your portfolio. Even less risk if the stock you buy is eligible for 70% margin value.

Here is an example. You buy 100 shares of TD at $83. Dividend is currently (expected to rise in the next 6 months) $3.16/year or $316 pre tax. Interest (tax deductible) will be 2.45% on $8,300 or $203.35. Already you are $113 ahead pre tax. Since the tax cost on your divs is lower than the tax deductibility of your interest, you will be even further ahead,

Risks? TD cuts their div, you might get a margin call if you borrow too much, interest rates go up a lot. I think in total these risks are rather low.
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Re: Margin Accounts and Money

Post by AltaRed »

The issue I see using margin is getting greedy when the math looks as good as in your example. There is a tendency to want more of a good thing and before one realizes it, they are margined to the max and a prime candidate for a Hindenburg experience. Discipline often craters to greed.
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Re: Margin Accounts and Money

Post by SQRT »

AltaRed wrote: 31 Jul 2021 12:58 The issue I see using margin is getting greedy when the math looks as good as in your example. There is a tendency to want more of a good thing and before one realizes it, they are margined to the max and a prime candidate for a Hindenburg experience. Discipline often craters to greed.
Agree. Key is not to borrow too much.
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Re: Margin Accounts and Money

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MrMike wrote: 30 Jul 2021 14:59 I maxed my HELOC to invest at 2.95% interest. Then while I waited for the increase to kick in, I used margin on Questrade and they charged me 6%!!! I couldn't believe it was that high. I was making 12% return so it was still good but they were taking half my dividends. Once the HELOC increase kicked in, I quickly paid Questrade back. My new interest was 2.65% because it was for a larger amount.
Before you borrow on margin, it's important to figure out the interest rate and margin call rules.

I am using buying power right now in my IB margin account. The margin interest rate there is very low, lower than prime, 1.616% right now on an amount less than 140K. If one borrows more, the rate will become lower.

One needs to be very disciplined when using margin. I have also a HELOC that I didn't borrow one cent yet. I keep the money I borrowed less than half of my buying power and also less than my available HELOC and monitor my margin account very closely. Worst case scenario, I will just move money from HELOC to margin account to avoid margin calls. IB is infamous with margin call without notification, but with using only half of available margin, I think I should have enough time to move money from HELOC when in need.

Also, I don't buy the actual stocks, instead, I sell puts. If put assignment does not happen, then no interest will be collected from me. E.g. I sold CM January 21 2022 put with strick price $145 and premium $7.35. I collected $733.75 premium excluding commission fee, and used up $14500 buying power. If CM ends up with a price above $145 at the expiration date, I get to keep the premium. It's about 7 month when I sold it. So it's about 8.67% return annualized. If I will be put the CM shares, then it will be like I bought the CM at a price of less than $138, which is not bad. By the way, IB has a very low commission for options, and options assignment is zero commission. So in case I am assigned 100 shares of CM, the commission fee will be only $1.25 for the option.

As this is borrowed money, I am playing it in a safer way, although using margin and trading options normally are considered as very risky. I think both are only tools, the risk level depends on how you use them.

Just begin to experiment on this recently. Just offer my thought for your reference.
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Re: Margin Accounts and Money

Post by Shante »

When you buy on margin, how do you repay it? If you transfer cash in does that repay it? Do dividends paid into the same account get credited towards it? Do you have to sell the shares that you bought on margin themselves to repay it? How do you see what amount you are being charged interest on?
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Re: Margin Accounts and Money

Post by SQRT »

Shante wrote: 02 Aug 2021 17:58 When you buy on margin, how do you repay it? If you transfer cash in does that repay it? Do dividends paid into the same account get credited towards it? Do you have to sell the shares that you bought on margin themselves to repay it? How do you see what amount you are being charged interest on?
It’s been a while since I borrowed on margin but at TDDI I recall the margin loan was just a negative cash balance. All cash transferred in whether through divs, stock sales or regular transfers, simply automatically reduced the negative cash (margin balance). At the month end the interest charged will need to be checked by you (it won’t be easy, similar to savings account interest). I used to just “eye ball it”.
Last edited by SQRT on 03 Aug 2021 08:44, edited 1 time in total.
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patriot1
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Re: Margin Accounts and Money

Post by patriot1 »

Shante wrote: 02 Aug 2021 17:58 When you buy on margin, how do you repay it? If you transfer cash in does that repay it?
Yes.
Do dividends paid into the same account get credited towards it?
Yes.
Do you have to sell the shares that you bought on margin themselves to repay it?
There is no distinction between the shares you bought on margin and the shares you already owned. You can sell any of them and they can sell any of them on a margin call.
How do you see what amount you are being charged interest on?
Cash balance (negative).
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Re: Margin Accounts and Money

Post by Shante »

Excellent, thanks folks.
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Re: Margin Accounts and Money

Post by gsp_ »

Dream2Retire wrote: 02 Aug 2021 14:21 Worst case scenario, I will just move money from HELOC to margin account to avoid margin calls. IB is infamous with margin call without notification, but with using only half of available margin, I think I should have enough time to move money from HELOC when in need.
How do you plan to move the funds from HELOC to IB and how long do they take to get there? Are they immediately available or is there a holding period and does IB start/keep liquidating assets if/while funds are on hold?

I would think HELOC funds can be moved instantaneously internally when all products are held with a single financial institution the same way transfers from any other account is processed but wonder about its effectiveness when transferring to an independent outside broker who liquidates first and asks questions later.

I have no knowledge in this area, no personal interest in margin. Being accustomed to instant transfers, I have been annoyed at how long transfers in take at IB, can only imagine how frustrating it would be in critical circumstances. Probably a good idea to have answers to all such questions beforehand, although as we’ve seen lately, the goal posts can be moved in crunch time.
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Re: Margin Accounts and Money

Post by Dream2Retire »

gsp_ wrote: 03 Aug 2021 06:14 How do you plan to move the funds from HELOC to IB and how long do they take to get there? Are they immediately available or is there a holding period and does IB start/keep liquidating assets if/while funds are on hold?

I would think HELOC funds can be moved instantaneously internally when all products are held with a single financial institution the same way transfers from any other account is processed but wonder about its effectiveness when transferring to an independent outside broker who liquidates first and asks questions later.

I have no knowledge in this area, no personal interest in margin. Being accustomed to instant transfers, I have been annoyed at how long transfers in take at IB, can only imagine how frustrating it would be in critical circumstances. Probably a good idea to have answers to all such questions beforehand, although as we’ve seen lately, the goal posts can be moved in crunch time.
If you do a bill payment today, it will arrive tomorrow, and be able to be used after tomorrow. If it is an E transfer, takes four business days.

It will be too late to move the money at the eve of a margin call. That's why I am doing this: use only less than half of the buying power, and once it's less than half (due to market down), move money from HELOC right away. The market needs to be down more than 60% percent with the margin I used before a margin call happened. And as the market will not likely be down so much within a week, I think I should be pretty safe.

I also like the instant transfer if everything is with the same institute and my first choice was TDDI where I have everything before opening an account at IB. But the low margin rate and low commission fees of options at IB are too attractive. So I decided the money saved is worth my trouble.
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Re: Margin Accounts and Money

Post by Eclectic12 »

Is there some trick to the "pay a bill today, it arrives tomorrow"?

I've had it take anywhere from tomorrow to three days later for the payment to be credited.
For one of them, the debit shows up four days later in the bank account but the source credits it four days earlier.

I'd personally test a few times as part of figuring out the timing.

For the "one financial group does all" - I have regularly deposited, done the online transfer fifteen minutes later and had both parts record it as some day.
IIRC, I have deposited from unrelated FIs with no hold then transferred to the brokerage despite being of the hold limits. I suspect this is because the brokerage account value could have paid them back, if there was a problem with the deposit.


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Re: Margin Accounts and Money

Post by Dream2Retire »

Eclectic12 wrote: 04 Aug 2021 16:26 Is there some trick to the "pay a bill today, it arrives tomorrow"?

I've had it take anywhere from tomorrow to three days later for the payment to be credited.
For one of them, the debit shows up four days later in the bank account but the source credits it four days earlier.

I'd personally test a few times as part of figuring out the timing.
When I using pay bill to deposit from TD cheque account to IB account, that's what always happened to me. So only personal experience, maybe depending on which banks?
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Re: Margin Accounts and Money

Post by AltaRed »

There is a reason to keep everything in-house.
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Re: Margin Accounts and Money

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AltaRed wrote: 04 Aug 2021 19:22 There is a reason to keep everything in-house.
I would like too but while IB normally charges from few cents to around $1 for a contract of option, TD charges more than $10. And the exercise of an option is commission-free at IB, but more than $10 again at TD. I guess it really depends on what you do in your account. I will save hundreds even thousands on option commissions each year at IB. But as I said, I am still experimenting with this. In case I figured options are not the way I want to go, I might go back to TD as I am basically a buy-and-hold investor.
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Re: Margin Accounts and Money

Post by SQRT »

AltaRed wrote: 04 Aug 2021 19:22 There is a reason to keep everything in-house.
Absolutely. At TD its virtually instantaneous from broker to bank. Same day the other way.
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