Comments on: How Stock Margin Works – The Basics

By: Chux03

Chux03 — Tue, 07 Apr 2009 15:25:51 +0000

The best thing about a margin account for me is the fact that when you sell a stock, the money is credited to your account immediately, unlike a cash account, which takes 3 days. I’ve had such an account since starting to be more active in trading but have only used it a couple of times to (for instance) double my position in Yamana when it was $8 (like now) but I don’t think I’ve ever used more than $3k (10%) on a $30k valued account, though the margin is MUCH LESS than that with my IB account. Even if you don’t use the margin to buy stocks, there’s many aspects of a margin account that are very valuable to the stock investor who does some frequent trading but isn’t really a day trader either. Knowing both types of accounts would have me recommending upgrading to a margin account if for no other reason than what I’ve mentioned here….
Good luck!!

By: Peter

Peter — Fri, 03 Apr 2009 02:47:38 +0000

I guess that the interest you pay on the negative cash balance in your account is tax deductible as well since you’re “borrowing to invest” and all. That seems pretty clear.

My question is this: If your broker issues a margin call on your account and you borrow money – say, from a line of credit – to cover the margin call, is the interest on the line of credit tax deductible as well? Can I claim the line of credit interest as an investment expense?

By: FrugalTrader

FrugalTrader — Wed, 01 Apr 2009 16:13:47 +0000

cf, I’m a half year late replying to this one. :) The answer is that it depends on the brokerage. I know that IB will liquidate without warning, but others like Questrade will phone/email you.

By: Cannon_fodder

Cannon_fodder — Tue, 05 Aug 2008 17:52:19 +0000

Thanks for this, FT. I’ve heard that there is an initial margin requirement and a maintenance margin requirement. I infer that you have to meet certain criteria to use margin when you first purchase a stock, but the maintenance margin is checked periodically (perhaps just shortly before the end of trading every day). If you are offside with margin then the brokerage will liquidate positions in order to get you back onside.

Do you know if it is typical for an online brokerage firm to allow you to configure the system so that an alert (e.g. via email) is sent to you if you are getting close to a margin call?

By: Pinyo

Pinyo — Thu, 31 Jul 2008 17:30:50 +0000

Since I use my brokerage account as a banking account, I used to have a bad habit of using my margin account as my check overdraft protection account. Well, it was a bit expensive and I am now working on NOT tapping into my margin account.

I know you said margin account is another word for leverage, but I think using margin account to invest is more of a “sure bet” to lose your money.

By: Don Yaschuk

Don Yaschuk — Tue, 29 Jul 2008 23:19:19 +0000

Can this be used like a credit line? If so how do i pay back the loan and/or reduce my borrowing costs? Sure I put cash back into the account but how do I apply it to the loan? Thanks.

By: Accelerated Mortgage Program

Accelerated Mortgage Program — Tue, 29 Jul 2008 21:29:39 +0000

interesting… thanks for the facts. im glad my dad works on a lot of stock/mortgage plans so he can help me to swallow all of this.
-Jake

By: Super Saver

Super Saver — Tue, 29 Jul 2008 19:35:52 +0000

Of course, the best way to avoid margin calls is to not buy a stock that goes down. Unfortunately, I haven’t mastered this yet, so I avoid using margin ;-)

By: Dividend Growth Investor

Dividend Growth Investor — Tue, 29 Jul 2008 13:51:09 +0000

Another problem when using margin is that the interest rate might not be fixed, but floating. So if you take on some margin when investing in stocks make sure that interest rates are not increasing.
That’s why if you want to use borrowed money in order to amplify your returns, do what FT does- take a mortgage on a property and then investing it in dividend paying stocks in order to get the cashflow to pay off the loan.