How to leverage out of the margin - Wealth Management Wizard

Margin Accounts

A margin account is an account that allows you to make quick transactions and take more risks. It allows you to take credit and have access to credit. If you were to have one and sell a stock you can choose to have it go to the margin account or cash. The transaction is faster if sent to the margin account. You will be able to buy something else the same day. If you ask for cash it could take a few days to have access to the funds. A margin account will also give you the ability to take a loan from the broker. In general I would not recommend doing this as it is risky. Another benefit is the ability to use options when you have a margin account.

Example:

$10000 cash in brokerage. You buy Disney at $100 per share. You now have 100 shares of Disney. You sell it 1 month later for $120 per share for a total of $12000. If you have a margin account you can buy something else right then. You buy QQQ a nice ETF. You are done. If you had to wait for cash then you would have to come back later to do this.

Why I say not to use margin debt to invest:

Same example as above; however this time you have $15000 to invest because you have a margin account that gives you access to a $5000 loan. They will charge you interest, possibly 8% or more to use this money. You buy Disney and flip it again. You have 150 shares for a month and it goes up and you sell it for a profit of $18000. You will have some fee here $400 in interest for the loan so net about $12600. Awesome; we just did better than just using our own cash right?

Here is the kicker. If the stock went down and your account could not be at a certain percentage the broker that you took the loan with can close you out. This is called a margin call. You have to increase your cash to maintain. If you don’t they close the position and you are now in debt. Disney went to $50 per share and you want to ride out the low but you can’t because it is not all your money. They close you out as you don’t have more cash to contribute. You end up with $2100. Loan was paid back $5000 plus $400 for interest. This can get worse if you owe money at the end.