The idea seems simple enough, borrow money from your brokerage costing X percent in interest and then buy stock returning Y percent. The difference between Y and X is pure profit. By doing this the returns on an account can get a good size boost. The small print: your loan is secured by the value of your stock. The value drops below a certain point and either the stock gets sold out from under you or you have to put more of your money into the account to offset the decline in stock price. Caution! Any bad trades you make the losses will be magnified by use of margin loans.
I have been buying stock on margin for awhile now. Day in and day out the value of my account ticks up and down. The loan amount sits right above my current value and remains steady day after day. A nice, red, steadfast reminder that my picks and decisions need to be right. In the back of my mind I can hear the interest stacking up day after day.
I will admit that using margin over the years has helped my returns. It has also upped the stress level a notch at times. I try not to overreach. I always leave a good cushion percent wise so that I can suffer a drop and not face a margin call. (Margin calls are when your stock is sold for you or its pony up some more cash time, depends on your broker.) I have yet to have to deal with a margin call. Knock on wood.
Some of my SNDK and CROX were bought on margin. So as the stock prices bounce around the one constant to my day it that the interest bill is still clicking upward.
Click the comment link and let me know if you do or do not trade on margin and what you think about it. I am always interested in hearing other’s take on things.
That’s it for today. With the interest meter running here’s a reminder to keep your eye on your EveryDay Money.