margin account

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ketanco
Posts: 136
Joined: Wed Jul 24, 2013 7:09 pm

margin account

Post by ketanco » Tue May 12, 2015 12:52 pm

for my regular , non retirement trading account, i have cash account type.

they told me if i open a margin account i dont have to worry about settlement dates anymore.

but is there a catch? does it mean for example, if i trade before normal settlement dates, it will mean i am trading with borroed money and i will pay interest? or, as long as i stay within my own money limits, even if i day trade, i dont have to worry about interest or other thing? so margin account means i can trade as often as i want, even including day trade as much as i want?

livesoft
Posts: 70242
Joined: Thu Mar 01, 2007 8:00 pm

Re: margin account

Post by livesoft » Tue May 12, 2015 1:03 pm

I have had a margin account for more than 20 years. One really doesn't have to worry about settlement times, but one does have to worry about

1. Do you want to pay margin interest? It's deductible if you itemize, but also adds some hassles if you take the foreign tax credit. I had about $2 in margin interest in 2014 which I did not bother to deduct, see this thread: http://www.bogleheads.org/forum/viewtop ... 1&t=131697

2.If your broker borrows your shares and sells them to someone else, there may be no ill effects, but it is impossible for you to notice if a qualified dividend got converted to non-qualified dividend.

3. Day trading would require at least $25,000 in the account if one got marked as a "pattern day trader" (search for the rule). That was never a problem for me.

4. It is sometimes difficult to know what you will be paying in margin interest. See if you can figure this out.
Monday: Sell VTI and buy BND
Tuesday: Sell BND and buy VTI.
How much margin interest do you pay?

Anyways, I have benefitted from my margin account, but also rarely use margin.
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Yesterdaysnews
Posts: 439
Joined: Sun Sep 14, 2014 1:25 pm

Re: margin account

Post by Yesterdaysnews » Tue May 12, 2015 3:12 pm

If I were a young guy I would buy stocks on margin, like use only 25% or 30% margin though so chances of margin call very low and you will accumulate and build wealth faster with so many years of added compounding.

The smart use of debt instruments is not something to be scared of.

MnD
Posts: 4580
Joined: Mon Jan 14, 2008 12:41 pm

Re: margin account

Post by MnD » Tue May 12, 2015 5:38 pm

I've had a margin account for ~25 years.
Don't have to worry about settlement dates was the main reason.
One time I used it to borrow $30K for a few days when remodeling when some funds didn't arrive right when expected.
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.

Topic Author
ketanco
Posts: 136
Joined: Wed Jul 24, 2013 7:09 pm

Re: margin account

Post by ketanco » Wed May 13, 2015 10:50 am

ok so if i have a margin account, and if i buy stock with unsettled money, i pay interest on the whole amount of new stock purchase until settlement date which is 1-2 days?

so lets say i sell stock ABC for 6000 on monday. Normally, i can use it again on thursday, which the money will have settled.

if i buy stock XYZ by using all or part of this unsettled money on Tuesday, it means, i pay interest on that amount from tuesday to thursday, for 2 days? so even if i am using my own money, just because i use it before settlement, i must pay interest on it until it settles? is it what we are talking about here? what interest is applied?

livesoft
Posts: 70242
Joined: Thu Mar 01, 2007 8:00 pm

Re: margin account

Post by livesoft » Wed May 13, 2015 1:40 pm

ketanco wrote:ok so if i have a margin account, and if i buy stock with unsettled money, i pay interest on the whole amount of new stock purchase until settlement date which is 1-2 days?

so lets say i sell stock ABC for 6000 on monday. Normally, i can use it again on thursday, which the money will have settled.

if i buy stock XYZ by using all or part of this unsettled money on Tuesday, it means, i pay interest on that amount from tuesday to thursday, for 2 days? so even if i am using my own money, just because i use it before settlement, i must pay interest on it until it settles? is it what we are talking about here? what interest is applied?
The above is not quite right. Even without a margin account (and with a margin account, too) one can sell ABC for $6000 on Monday and immediately buy XYZ at any point thereafter: Monday, Tuesday, Wednesay, Thursday, etc. One would not pay interest (not even margin interest) if one bought XYZ before the sale of ABC settled.

Here is a completely different scenario:

If one sells ABC for $6000 on Monday and one needs to remove the $6000 cash proceeds in order to pay ransom for your dog (a true emergency), then one cannot take the $6000 cash out on Monday to pay the ransom unless one has a margin account. Without a margin account, one would have to wait for the trade to settle 3 days after the sale in order to remove the cash. With a margin account, one could take the cash out immediately (it would probably take an ACH or a day or so though) and pay 3 days of margin interest when the trade settled and the "loan" would be paid in full by the cash from the settlement.
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