I can hear the horror stories now, just spare me please! Let’s look at the facts first regarding a margin account.
Most investors don’t understand the power and flexibility of having your taxable investment account classified as a “margin account”. There is NO downside to doing this other than taking foolish risks. A Margin Account is like attaching a line of credit to your brokerage account, or a Home Equity Line of Credit to your house. If you don’t take the money there is no interest expense. However, if you ever need it it is there immediately. In addition, this type of loan does not show up on any credit report.
Here are some of the benefits to converting your account into a margin account:
1. Leverage. You can use your existing securities to help you buy more securities. It can increase the size and value of your portfolio, especially during up markets. Let’s say that you are pretty comfortable that the S&P will go up 10% in the next 6 months. You can use money in your margin account to buy the S&P index. Your gains will exceed your interest expense and you will profit on borrowed money. If you are a day trader, you must have a margin account to be able to get in and out of large positions. For example, when I was day trading, I had a relativity small professional account, about $100,000. However, I had purchasing ability intra-day of 4 x (Tradestation), allowing me to make multiple buy-sell trades up to $400,000 each.
2. A Quick Convenient Loan. What if you had say $500,000 in your brokerage account and you needed an immediate $100,000 to cover an emergency. You need it tomorrow, you can wait for a loan, how would you come up with these emergency funds. Just tap your margin account, on-line transfer $100,000 from your brokerage account to your checking account at your bank and you have it! You did not have to sell any securities to do it. There is NO preset payment plan required. Your account must just continue to meet your margin requirements. By the way, the interest charged on your margin account is FAR less than interest on any credit card. Many times it is equivalent to a Home Equity Line of Credit (HELC) interest rate.
3. Tax Deductible Interest. Interest on margin loans may be tax deductible. Consult your tax advisor for details regarding your particular situation.
4. Short-Selling and Options. Having both a margin and an options agreement allows you to place advanced options orders such as spreads, butterflies, and uncovered options on equities, ETFs, and indexes. In addition most brokerage houses require a margin account to allow you to “short” a stock (betting that it will go down, not up). When you short a stock, you are actually behind the scenes “borrowing” it from your broker.
How easy is it to have your current account at say Fidelity, Charles Schwab, etc converted to a “margin account”. Years ago I just called my Fidelity rep, told him I wanted to convert my account and by the following morning all of the securities in my account were shown as “margin”. From that point on I invest (buy or sell) in my margin account. There is NO fee or extra effort required. In my case right now I don’t use any “margin”, but I could and I could access a large sum of cash for any emergency.
I would be remiss in not acknowledging the “risk” of a margin account. The risk is identical to a credit card risk when you charge more than you can afford and get stuck with high interest expenses. If you are irresponsible with credit, maybe a margin account is not for you.