Quick Q about margin (investing)

[Ghiddy]

Can someone briefly explain how margin works? If I were to buy some investment (e.g., stocks, metals, oil) with cash, would margin have any effect on me? It sounds to me like margin is basically collateral you have to put up when investing with borrowed money.

I'm not investing in gold or silver, but I read this article and the question came to mind. Specifically I'm curious about whether or not people investing in silver are doing so with borrowed money:

http://www.businessinsider.com/silver-market-why-cme-must-raise-margin-requirements-by-30-2011-4

In other words this seems like a casino where you go put in a security deposit of $1,000 in return for a casino credit card with a $5,000 limit. The credit card works at any machine, or card game or whatever in the casino and people are free to go around until they lose $5000. At any time they might determine that everyone in the house is drunk as fuck and are likely to lose money, so they suddenly demand you add more cash to the deposit. You can either transfer existing balance of the card, or put up more cash.

On top of that the casino's gambling card denominated in "credits", not dollars, and the $ value of credits changes according to "market rules".

 

[DaveSimmons]

Yes, it's gambling not really investing, with money that you don't have. It's something you should stay very far away from.

If you set up a brokerage account for margin trading, they loan you extra money to lose, uh, gamble away -- no wait I mean to make riches off of with brilliant investments.

 

[a123456]

Yeah, that's basically it. You borrow money at some interest rate from the broker in order to get more leverage in your trading. They have margin requirements, which means your value has to be X% of what you borrowed. If your investments drop below the threshold, they sell your stuff for you to pay them back.

Basically, things are great if you make money and things are really bad if you lose money.

 

[manlymatt83]

Easy. Margin simply gives you the effects of owning X leverage amount of the underlying.

So if you put $1000 into GM with 100:1 leverage, you would CONTROL (not own) $100,000 worth of GM stock. If GM stock goes up 2%, that $100,000 would now be worth $102,000... so you would get $2000 increase in value. If it drops 2%, welcome to a bad margin call... you would lose $2000. Since you only had $1000 in the account to begin with, you would owe $1000 more.

 

[gevorg]

Trading stocks on margin is like gambling with a credit card.

 

[Ghiddy]

OK, and what about my question regarding cash only investments. If i were to buy everything with cash, would margin requirements ever be relevant to me?

I remember that day traders are required to put in $25,000 into margin or something. I don't understand why you'd have to do that if you only bought with cash (never on credit).

 

[Spikesoldier]

ah, the stock market. the elite casino

 

[a123456]

OK, and what about my question regarding cash only investments. If i were to buy everything with cash, would margin requirements ever be relevant to me?

I remember that day traders are required to put in $25,000 into margin or something. I don't understand why you'd have to do that if you only bought with cash (never on credit).

If you buy with cash and never use margin, then any margin requirements don't apply to you.

The day trading thing is separate. If you trip the pattern day trading trigger (4 round trips in any 5 days), then you need that 25k.

So if you keep under that, you can go all cash. Just know about the settlement periods if you want to trade a lot with cash.

 

[Demo24]

OK, and what about my question regarding cash only investments. If i were to buy everything with cash, would margin requirements ever be relevant to me?

I remember that day traders are required to put in $25,000 into margin or something. I don't understand why you'd have to do that if you only bought with cash (never on credit).

No, you can chose to either apply for a margin account or simply have a cash account. Either way you aren't obligated to use it, so if you have the minimum deposit for margin requirement you might as well. I would not suggest you use margin but it does mean your money clears faster than a cash only account, and you are allowed a few day trades each week(this can be beneficial if something unfortunate happens after you place an order, although if you are just long term investing this will be less of a factor).

25k is the minimum account value to day trade constantly. You're never putting money 'into' margin, its basically like a credit line. One credit card might have a 1k limit, the other 30k, etc. Differs based on your income and your account value, and what the broker wants to give you.