To Use or Not To Use Margin?

[pirx]

Hello everyone. 🙂

I'm just wondering how many of you are using margin and how often? I've never used it yet, but a friend of mine says, that he uses it as much as he can. His reasoning is, that the market's long term profits are at around 10%, and while the cost of borrowing money (margin) stays below 10%, he makes use of it.

Anyway, if Firstrade's margin rate is 9% (for accounts below $50.000) - does that mean, that if I borrow money from them, I'll pay 9% interest on that money per year? Or is this calculated somehow differently? I don't plan to use margin, but I'm curious. 🙂

Any help is welcomed. Thanks.

 

[Rhody Trader]

If you're broker's margin rate is 9% then yes, that is the annualized rate you will pay. Obviously, when you are not using margin you won't pay the margin interest.

Be aware that margin interest rates fluctuate with market rates. They are not fixed.

I've traded stocks for years and can employ margin on my account, but never have. I use options instead to employ leverage, but that may not be right for your particular style.

 

[pirx]

Hi, Rhody! Thanks for the reply.

Well, I guess I won't use margin either. Probably it isn't worth the risk. If I'd be using full margin for a whole year, I'd better be making at least 15% on my capital - and I would still be left with only a 6% profit - hardly better, than I'm getting on my long-term bank deposits. And I don't even want to think about, how would it be, if I would finish the year with -10% loos, and with a full margin, that would total to -19%!

 

[Rhody Trader]

It sounds like you don't really understand margin.

If you use it you do so to take bigger positions than you would have been able to, or more of them. That means a $10k account could trade up to $20 in positions at 50% margin. If you do that a 10% return becomes a 20% return (and vice versa if you lose). Since you would only pay interest on the margin then you would net 11% - assuming you were totally margined the whole year.

 

[pirx]

If I'm able to produce only mediocre profits (10% profit, which is also kind of nice), it seems hardly worth the trouble. And if I understand you correctly - If I loose 20% with margin included (what would be, without margin, only a 10% loss), I would still have to pay 9% interest, which would be a total loss of -29%?

 

[Rhody Trader]

Exactly.

By the way, for those non-stock traders who might come upon this thread, the margin interest only applies to equity trading. Futures and Forex traders don't pay margin interest. Those markets work differently.

 

[pirx]

OK, thanks for helping and a thanks for pointing out, that margin works differently for Futures and Forex! I did not know that either.

 

[Mr.J-Arthur]

Yup, Futures is highly leveraged, yet we don't have to pay for it! and there is no pattern day trading rule by the SEC!