I’ve been investing in the stock market for 5 years only using my own cash only. My portfolio is currently at around $150k right now. I’ve been getting emails about them changing the margin rates to 5% or lower just depends how much margin you use. It sounds like a good deal just use margin to invest in the S&P 500 and Nasdaq and low risk ETFs and you’ll outperform it in the long run. And a bunch of people are saying margin is risky and you shouldn’t use it. I plan on using like 20-25% of the available margin to invest in ETFs because I’ll have cash on the side just in case there’s a bear market and I know there’s a chance to get margin call. Am I missing something that I should be aware of why this is a bad deal?
Investing using Margin with 5%?
byu/Consistent-Adagio141 ininvesting
Posted by Consistent-Adagio141
7 Comments
You want to take out a 10%+ loan to hodl ETFs? How high were you when you wrote this?
The thing you’re missing is something called a margin call when market conditions change and the lender wants to you immediatly increase your capital which cal lead you to have to liquidate positions at a bad time to satisfy their criteria and has seen many people blow up their entire portfolio.
Unless you’re experienced enough at investing and pay enough attention to your portfolio and the market every single day then it’s probably not a great idea for a casual investor.
Also go look up what led to the 1929 stock market crash, a bubble almost entirely funded by margin.
5% margin is VERY preferential. This sounds fishy and I wouldn’t expect that low of a rate at your asset level so before anything else, understand what rate you would actually be subject to. It’s probably quoted at prime rate or broker call rate plus 5% or so. All in is probably 10%+
Also, you don’t have the option of keeping cash on the side. Margin essentially allows you to go negative cash in your account. Meaning that ALL cash in your account is used first and then any overage shows up as a negative cash balance. In fact, this is the only way that makes sense. Long explanation on why, I’ll move on for now. Any time cash comes into the account from sales, dividends, interest, deposits, then the margin balance is automatically paid down.
Now onto the investment argument, at a 5% margin interest rate, it probably makes sense in the long run as long as you aren’t maxed out on margin. The problem is not to get blown up in a recession and forced into sales to cover a margin call. However, I suspect the real margin rate is low double digits and then it never makes sense in the long run since on average, you won’t earn as much as the interest rate you are being charged and you’ll be selling to cover the interest payments. If you are a savvy investor you can make it work, but a casual investor will most likely get blown up. I wouldn’t recommend it.
Low margin rates sound attractive, but margin still magnifies downside and forces decisions at the worst times. Even a mild drawdown can turn into a margin call if markets drop fast. Using 20–25% might work on paper, but it removes flexibility and adds risk you do not need for long-term ETF investing.
Terrible idea. Only time you should use margin is if the market dips 15% or more and you ran out of cash to deploy.
Rule #1 don’t invest what you can’t afford to lose.
Rule #2 don’t use money you don’t have.
This is a bad idea your going to lose money statistically, you are not special.
Only use margin to get out of trouble.
Don’t use it to get into more trouble.
Using margin longterm is dangerous. The market is way more volatile than you may think — AND the rules of the game on margin can and do change when the market swoons. Brokerages often change what they allow for margin requirements.
I only use margin ultra short term (like over a weekend) to work out a trade. For example, if I sold a Put and got assigned the stock — but I never really intended to own the shares. I use margin to cover the trade and then methodically sell the shares in the next few days.