Post by Admin/YBB on Oct 11, 2021 17:59:46 GMT -6
Margin Call
MARGIN is loan from a broker using securities held on brokerage account as collateral; there is no further paperwork& there are no scheduled payments. Beware that the days of using margin & depositing cash/check with the broker within a few days or waiting to get a MARGIN CALL from the broker are long gone. These days all you may get is an online ALERT posted on the account in the morning that funds are due. There have been cases where people called their brokers that they were on the way to the brokers’ office to drop the check, but their accounts were cashed out by the time they reached the brokers’ office. Risk to brokers is that under-margined customer may lose more money than in the account in a fast-moving market & then brokers may be on the hook for the unrecovered losses. Margin loans can be used for almost any purpose (buying more securities or withdrawn for other personal or business uses), but many other types of consumer loans (personal or mortgage loans) have clauses that forbid using them for buying securities.
When opening brokerage account, you may be asked to sign MARGIN & SHORT AGREENENT. As part of this agreement, you typically allow the broker to also LEND SECURITIES from your account to short sellers & only big customers may get paid for this. For dividend-paying securities, you are provided with payments in-lieu (PIL) of dividends that are nonqualified; due to complaints by retail customers who do not understand this, many brokers have stopped lending securities held in small retail accounts. If you do not want some securities to be lent out, you can ask the broker to move them to the cash side. Mutual fund purchases become marginable only after a few days (30 days is typical); mutual fund purchases require full price (i.e., they cannot be bought on margin).
Fed REGULATION T (Reg T) requires initial 50% margin to buy marginable securities (150% for short sales). After that, brokerage/house MARGIN MAINTENANCE rules govern & that is typically 30-50% equity (notably above the 25% maintenance required by Reg T); for short sales, maintenance margin is 100% of market value plus 30-40%. Once the account equity falls below the house maintenance requirement, broker will sell enough securities using its sole discretion (i.e., you have no say on this) to bring the equity up to a certain level; this where many accounts are ruined. Infinite loss on short positions is a myth due to recurring margin calls for more money; many traders tend not to meet margin calls & dispose of losing under-margined positions themselves or let the broker do that.
Broker may have different LEVELS of margins for different securities & some securities may not be marginable. Many brokers do not allow securities priced under $3 or $5 to be margined. This is one of the reasons that some stocks & funds do reverse-splits (another reason may be exchange listing rules on very low-priced securities). The fact that brokers apply this rule to funds (ETFs, CEFs) is unreasonable, but you cannot argue with the broker, especially when you are in margin trouble. Beware that margin requirements for securities may be changed by the broker without much prior notice & this can cause sudden unexpected problems in a fast-moving market. Brokers simply add up margins required for various holdings & may not account for the fact that risks of some positions may offset those of the others. Some firms that advertise very low margin rates are also very strict about their margin rules. #PersonalFinance 10/11/21.
MARGIN is loan from a broker using securities held on brokerage account as collateral; there is no further paperwork& there are no scheduled payments. Beware that the days of using margin & depositing cash/check with the broker within a few days or waiting to get a MARGIN CALL from the broker are long gone. These days all you may get is an online ALERT posted on the account in the morning that funds are due. There have been cases where people called their brokers that they were on the way to the brokers’ office to drop the check, but their accounts were cashed out by the time they reached the brokers’ office. Risk to brokers is that under-margined customer may lose more money than in the account in a fast-moving market & then brokers may be on the hook for the unrecovered losses. Margin loans can be used for almost any purpose (buying more securities or withdrawn for other personal or business uses), but many other types of consumer loans (personal or mortgage loans) have clauses that forbid using them for buying securities.
When opening brokerage account, you may be asked to sign MARGIN & SHORT AGREENENT. As part of this agreement, you typically allow the broker to also LEND SECURITIES from your account to short sellers & only big customers may get paid for this. For dividend-paying securities, you are provided with payments in-lieu (PIL) of dividends that are nonqualified; due to complaints by retail customers who do not understand this, many brokers have stopped lending securities held in small retail accounts. If you do not want some securities to be lent out, you can ask the broker to move them to the cash side. Mutual fund purchases become marginable only after a few days (30 days is typical); mutual fund purchases require full price (i.e., they cannot be bought on margin).
Fed REGULATION T (Reg T) requires initial 50% margin to buy marginable securities (150% for short sales). After that, brokerage/house MARGIN MAINTENANCE rules govern & that is typically 30-50% equity (notably above the 25% maintenance required by Reg T); for short sales, maintenance margin is 100% of market value plus 30-40%. Once the account equity falls below the house maintenance requirement, broker will sell enough securities using its sole discretion (i.e., you have no say on this) to bring the equity up to a certain level; this where many accounts are ruined. Infinite loss on short positions is a myth due to recurring margin calls for more money; many traders tend not to meet margin calls & dispose of losing under-margined positions themselves or let the broker do that.
Broker may have different LEVELS of margins for different securities & some securities may not be marginable. Many brokers do not allow securities priced under $3 or $5 to be margined. This is one of the reasons that some stocks & funds do reverse-splits (another reason may be exchange listing rules on very low-priced securities). The fact that brokers apply this rule to funds (ETFs, CEFs) is unreasonable, but you cannot argue with the broker, especially when you are in margin trouble. Beware that margin requirements for securities may be changed by the broker without much prior notice & this can cause sudden unexpected problems in a fast-moving market. Brokers simply add up margins required for various holdings & may not account for the fact that risks of some positions may offset those of the others. Some firms that advertise very low margin rates are also very strict about their margin rules. #PersonalFinance 10/11/21.