margin account | Freedom 35 Blog

Margin Accounts Update

Aug 082014

As most of you already know I share all the stock holdings in my U.S. margin account under the “Portfolio” menu above. But let’s take a closer look at my holdings today.

At the end of July I was holding 16 different stocks in my U.S. margin account.
I gradually deposited a total of $14,000 USD into this account over the last 3 years and bought a total of $35,600 of stocks (“book value.”) This means both my risk as well as potential for reward are increased by 2.5 times (2.5 leverage)
Last year the S&P 500 index gained 30%, and my U.S. margin account gained about 75%. Hurray for leverage!
The shares in this account today are worth almost $50,000. The “Cash Balance” amount of -$22,301.64 you see below already has the 4.5% annual margin cost built in since interest is charged to the account every month which adds to the size of the negative cash balance. However I also receive dividend income from many stocks inside this account. So overall the net margin interest over the last three years eroded away about $700 of my portfolio value which means my actual EQUITY in the account today is worth $27,518. That’s almost 100% return on my initial $14,000 investment 😀

14-07-marginus

My Google class-A shares is showing a 14.95% loss but that’s a little misleading because I’m actually up 69% on Google so far 🙂 The tech giant did a stock split earlier this year. The market value was split between the old and new class of shares, but my book value remains attached to my original purchase.

And below are some details about my Canadian margin account for those who might be interested.

Margin Accounts – Walkthrough

Stocks 11 Responses »

Apr 132012

If you currently have a regular cash account for trading stocks, you can consider getting a margin account as well, or even convert your existing account into a margin account. There is no additional risk in doing this. You only take on more risk IF you buy more than what you can afford and borrow on margin. Other than that margin accounts work the same way as regular cash accounts. I bought some Apple stocks last month right after their dividend announcement (^_^) Here’s what happened. First, I ordered some Apple stocks. This is the same as buying stocks in a regular trading account.

Next, I made sure my order went through. It did. My broker confirmed I bought 3 Apple shares on March 20th for $595.08 each.

So let’s take a look at my account today. The information shown about my Apple stocks are the same as if I bought them in a regular cash account except for one difference; In a margin account, I have something called “Loan Value” which in this case means I can borrow up to 70% of the market value of my Apple shares if I choose to.

The loan value of $1,307 above is how much 3 shares of Apple will allow me to borrow. Since I have many other stocks in this margin account, I can borrow a total of $19,016 if I wanted to. But I’m only borrowing about $14,439 of that right now (as you can see from my negative cash balance,) which means I have $4,577 margin available. The $19,016 changes everyday depending on how much my stocks are worth. I don’t want to borrow the full $19,016 because if my stocks drop in value tomorrow I would get a margin call, hence the $4,577 buffer.

The total market value (in yellow) is what my account is worth today if I sold all my shares and paid back the margin loan. The total book value (also in yellow) is how much of my own money I’ve put into this account. So if I sold everything today I would make close to 10% profit on this entire account. But the real value of my stocks didn’t even appreciate by 10%. I was able to buy $26,335 worth of securities by combining $11,897 of my own money (total book value) with $14,439 of borrowed margin money. Today my stocks have a market value of $27,505. Which means they’ve only appreciated by 4.4% on average. This is the benefit of a margin account. Apple’s share price only increased by 4.5% since I bought it last month, but I’ve actually made more than 10% on it by using leverage. You can double your returns by borrowing other people’s money. But at the same time you can also just as easily double your losses if stocks move downwards. So be careful.

In a future post, I’ll write about interest rates when borrowing from margin accounts and how to use margin money to pay off student loans, credit card debts, or anything else.

Marginally Better Results

Controversial 20 Responses »

Mar 062012

How Margin Accounts Work

A reader asked me awhile ago about my margin account. As you know, I like to use leverage. So when I found out I could own stocks without actually paying for the full amount, I began to think about the possibilities, and opened up a margin account through my discount broker. I simply made an appointment with a financial adviser from my bank to fill out some paperwork. To understand margin accounts, let’s first look at a regular cash account. The portfolio’s value is what the stocks are worth plus any cash balance in the account. Pretty straight forward.

But with a margin account, we can use our stocks as collateral and borrow money against them to buy more stocks. This is similar to using a mortgage or home equity line of credit to leverage against real estate. For example, let’s say we have $30,000 in cash right now and want to buy a house. We can buy a small house that’s worth $30,000 using cash. If the market is hot and our house appreciates by 10% then we make $3,000. If the price goes down 10% then we lose $3,000.

But if we wanted to buy a $100,000 house instead using our $30,000, then we will need to get a $70,000 loan (mortgage.) If the value of our home increased 10% from $100K to $110K then we would make a nice $10,000 profit if we sold it. This return is a lot higher than if we didn’t borrow additional money to invest. However if the house drops in price to $90,000 and we sell it, we would lose $10,000. Using leverage multiplies the gains and the loses. This is basically how a margin account works too.

We can put up just 30% of the total cost of stocks we want to buy and borrow the remaining 70% from the bank. Just like with a HELOC, we have to pay interest on the money borrowed on margin. Last year I told everyone I bought Cineplex (CGX.TO.) Their shares tripled in price over the last decade. And the nature of their business is relatively recession proof (their stock went up over the 2 years spanning 2008/2009.) Below is a screenshot of my Cineplex shares in my margin account.

Unlike a mortgage, we don’t pay down the margin loan over time. The loan percentage (70% in this case) fluctuates with the market value, and we only pay the interest portion of the loan on a monthly bases. I recommend putting dividend generating stocks into margin accounts to help with those interest payments. Cineplex pays a dividend which, after tax, works out to 4.4%. Meanwhile, the interest rate on my margin loan works out to 3% after the tax deduction. So in the end I walk away with the difference of 1.4%. There’s no guarantee that Cineplex will continue to grow in the future. The 1.4% I make is from borrowed capital. Anyone can make a 1.4% annual return with their own money, but not everyone can do the same for themselves using other people’s money. This is why I buy stocks on margin. To increase my chances of success,

This is just an overview of how margin accounts work. But there is much more to it than this. In a future post, I will discuss loan values, margin calls, and other useful ideas for margin accounts besides investing. Buying stocks on margin can be very complicated and risky. It is not for every investor.