Trading on Margin

[ep510]

I'm interested in trading on margin, but have a few questions regarding the process:

1. Are interest payments automatically deducted from my account whenever I sell?
2. If the margin rate is 10.5%, is that rate compounded continuously? Daily? What is the equivalent rate on a daily basis? Can you please explain how that works?
3. If maintenance requirement is 50% and maintenance excess equals total equity minus maintenance requirement, then shouldn’t:
- Maintenance excess be equal to the value of maintenance requirement
- Maintenance excess should be equal to 50% of total equity as well
4. If the maintenance requirement is 50%, am I correct that my maximum buying power (before a margin call) should be two times my total equity?
5. How do I interpret my cash balance and market value of my portfolio including shorts? It seems that cash balance – market value = total equity. But when I short a stock, my cash balance increases while my market value decreases. Am I right to assume that when I short a stock, I automatically am trading on margin (i.e. even if I have not surpassed my total equity in purchases, I will automatically borrow money from Zecco?)

I would greatly appreciate any answers to the above questions.

Thanks,
Eric

[gull]

2.

10.5 %/year is about 10.5/365 %/day and precisely 1.105^(1/365.25)-1 %/day.

Trading on margin is -EV.

[kimchi]

If you are trading then how long do you expect your average holding period to be?

It might be worth a look into CFD's as they offer margin upto 10%, so you can hold a position 10x your stake.

Spreadbetting gives you exposure to 100 shares for each $1 you bet - but i don't think it's available in USA.

This is obviously suicide without proper risk management, but it allows you to extract greater profits from smaller moves than traditional share trading.

The margin rates are usually the interbank rate plus 1-2%. If you are short, then you actually get paid interest on your position.

With an edge, discipline, and risk managemnt ,it is +EV. Contrary to what PP said.

[MrBlue]

Hm...he is asking basic questions about margin. I wouldn't recommend touching exotic products like CFDs (which are rare in the US anyway) for oooh, ever.

AFAIC, CFDs are used to bypass VAT which doesn't exist in the US anyway.

[pig4bill]

Margin calculations are often ridiculously complex. Most of the time my brokers can't answer my questions, and they refer me to their margin department. Yes, brokerages have a special department just to deal with margin.

For the most part, I trust their calculations unless something looks way out of wack. For the number of positions I usually have, the mix of long and short, some of which are marginable and some not, it's just not worth it to go through myriad calculations every morning to make sure they got it right.

1. Depends on your broker. Some do it every day, some a few times a month, and some once a month.

2. Your broker should have an APR listed somewhere.

3 and 4. Don't confuse margin requirements with maintenance requirements. As far as how much you should have at any given moment, see my above statements on the complexity of calculations. The margin requirement to initiate a position is 50%, but the requirement to keep it overnight is less. Depends on your broker and how much they like and/or trust you.

5. Yes, on margin when you short. The only thing you should really worry about is how much buying power you have. The broker will tell you every morning how much you have.

[ep510]

Just to clarify, margin interest is charged on a daily basis? If I were to day trade (buy/sell in same day), do I still get charged margin interest?

[squiffy]

I tried trading on margin a bit, but it's pretty risky, especially with interest rates rising, which increases your borrowing costs.

Since I like to do medium term trades of about 3-6 months to a year, I much prefer one or two year leaps -- the long term options to get leverage.

I am not sure why you would use margin except for administrative purposes, when you borrow money for one or two days while waiting for a trade to clear, then you pay off the loan immediately when the funds clear.

Can anyone explain why a long-term value investor would use margin, instead of a long-term leap???

Let's say I think AAPL will go from 80 to 100 in one year. Why would buying shares on margin, be superior to buying long-term calls at a certain strike price.

Let's say I have 10k to invest. What are the pros and cons. I can only see downside to the margin, except that you can deduct the interest costs.

[pig4bill]

[ QUOTE ]
Just to clarify, margin interest is charged on a daily basis? If I were to day trade (buy/sell in same day), do I still get charged margin interest?

[/ QUOTE ]

Some brokers might. Mine did not.

[pig4bill]

[ QUOTE ]
Can anyone explain why a long-term value investor would use margin, instead of a long-term leap???

[/ QUOTE ]

I don't invest long-term, but depending on the volatility, the leap could cost you more than the margin interest.

[ QUOTE ]
Let's say I think AAPL will go from 80 to 100 in one year. Why would buying shares on margin, be superior to buying long-term calls at a certain strike price.

[/ QUOTE ]

If the stock ends the year at 80, you lose all the money you paid for the LEAP. That might be more than the interest charged for margin.

[Chrisman886]

It's not a very good idea to do margin for the long term IMO. You need the stock to rise (and possibly compound) by the interest rate just to break even. Just buy options if you want more leverage. For short term and daytrading, however, margin is great.

You generally get charged margin interest monthly, but it gets compounded daily.