ShmoopTube
Where Monty Python meets your 10th grade teacher.
Search Thousands of Shmoop Videos
Finance: What are margin account, margin debt, margin interest and margin limits when trading? 1 Views
Share It!
- Terms and Concepts / Muni Bonds
- Terms and Concepts / Regulations
- Social Studies / Finance
- Terms and Concepts / Wealth
- Terms and Concepts / Charts
- Terms and Concepts / Bonds
- Finance / Financial Responsibility
- Terms and Concepts / Investing
- College and Career / Personal Finance
- Terms and Concepts / Financial Theory
- Terms and Concepts / Forex
- Life Skills / Personal Finance
- Finance / Finance Definitions
- Life Skills / Finance Definitions
- Finance / Personal Finance
- Terms and Concepts / Mutual Funds
- Terms and Concepts / Accounting
- Terms and Concepts / Stocks
- Courses / Finance Concepts
- Subjects / Finance and Economics
- Terms and Concepts / Trading
- Terms and Concepts / Banking
- Terms and Concepts / Tax
- Finance and Economics / Terms and Concepts
- Terms and Concepts / International
- Terms and Concepts / Managed Funds
- Terms and Concepts / Ethics/Morals
Transcript
- 00:00
Finance Allah shmoop what is a margin account I think
- 00:08
the bank of you you have one hundred grand in
- 00:11
stocks saved in a margin account set up at your
- 00:14
kindly loving Morgan Stanley or Schwab brokerage Lots of lawn
- 00:18
mowing and rich Uncle dying went into getting that hundred
Full Transcript
- 00:21
grand Bessie Mae dies You need Bessie Mae two point
- 00:25
Oh the kind with round wheels this time Yeah she'll
- 00:28
cost twenty five grand You don't want to pay the
- 00:30
fifteen percent interest that the auto dealer offers you generously
- 00:34
loaning you the money And if you sell twenty five
- 00:37
grand worth a stock well you'll pay almost ten thousand
- 00:39
dollars in taxes so you'd have to sell something closer
- 00:42
Duff forty grand to net the twenty five grand after
- 00:45
tax And wow that's expensive for Bessie Mae Two point
- 00:49
Oh with the round wheels and air conditioning and windows
- 00:53
that actually work So you really don't wanna have to
- 00:55
sell stock The vastly cheaper solution is to borrow money
- 00:59
from yourself All right Well how do you perform this
- 01:02
magic Well your brokerage account is set up as a
- 01:06
margin account That is when you set it up You
- 01:08
checked and signed all the boxes that claimed you knew
- 01:11
what you were doing were of sound mind when you
- 01:14
signed and you realize that there's a fifty percent margin
- 01:17
limit on your account which is standard practice these days
- 01:19
So what does all that mean Well it means that
- 01:21
on your hundred grand of stocks in your brokerage account
- 01:23
you can borrow twenty five thousand dollars like tomorrow by
- 01:26
writing a check against it too dishonest Dean's discount dealership
- 01:31
and pay interest to Morgan Stanley or Schwab or whoever
- 01:34
has your brokerage account But you'll only pay about one
- 01:36
hundred basis points over prime rates or in today's world
- 01:39
three four percent if something like that nothing like that
- 01:42
fifteen ish percent egregious amount that the auto dealer would
- 01:46
want And this makes sense right when you're borrowing from
- 01:48
yourself If you ever don't pay yourself back while going
- 01:52
to be really easy to track down the deadbeat right
- 01:54
Morgan and Schwab happy to pledge or Chi pa Tha
- 01:57
Kate your stock to a bank and provide you whatever
- 02:00
cash liquidity you need by Bessie Tuo Morgan and Schwab
- 02:03
will pay maybe two percent or less on the money
- 02:06
They let you borrow for three percent or more so
- 02:09
they make a one ish percent spread for doing almost
- 02:12
nothing Nice work if you can get it And that
- 02:14
fifty percent margin limit thing Well what does it mean
- 02:16
Well let's say you've borrowed that twenty five thousand dollars
- 02:19
and weren't disciplined to pay it off And it just
- 02:22
sat there And then we had a really bad bear
- 02:24
market Like a mortgage crisis market that went down by
- 02:28
half or the individual stocks he loaned in there simply
- 02:30
went down by half And all of a sudden one
- 02:32
day you wake up and you have fifty thousand dollars
- 02:35
in change in the value of stocks in your account
- 02:39
Oh this is a problem Why Because if you don't
- 02:42
have atleast double in value in your account that money
- 02:45
you've borrowed the brokerage has the right to just sell
- 02:48
willy nilly Whatever assets you have to be certain that
- 02:51
you in fact keep it least double coverage right Why
- 02:54
Well they're letting you borrow money or at least borrow
- 02:56
liquidity at a very low price So they understandably expect
- 03:01
very low risk And if the market then goes down
- 03:03
another ten percent and your value is down to forty
- 03:06
five grand and you still have twenty five thousand dollars
- 03:09
in margin or borrow their well Then the brokerage can
- 03:12
and will immediately pick whatever stocks they want to sell
- 03:15
an anger behalf They will sell five grand worth of
- 03:17
stock just to get you to that magic half zone
- 03:20
So think about it There's a big big problem Why
- 03:22
they sell five thousand dollars worth of stocks to pay
- 03:25
down your twenty five thousand dollars of borrowing to then
- 03:27
be just twenty thousand Well in a margin account you
- 03:30
have forty grand now in value But those were stocks
- 03:33
that were gifted to you or maybe stocks you owned
- 03:36
a long time So now not only has the brokerage
- 03:39
soul chairs at a low price but you will owe
- 03:41
taxes on the gains from that five grand of sales
- 03:45
so you'll have to sell more shares down the line
- 03:47
to pay the kindly loving people of the I R
- 03:49
s bottom line Margin accounts are great if you manage
- 03:53
them and if you don't well yeah they end up
- 03:55
managing you
Up Next
How are risk and reward related? Take more risk, expect more reward. A lottery ticket might be worth a billion dollars, but if the odds are one in...
Related Videos
How do credit card companies work? Credit card companies are, in a way, lenders. They give consumers a rectangular piece of plastic that allows the...
How do some accountants “cook the books”? Cooking the books refers to accountants making company’s financials look much better than they are....
How do you become incorporated? Go to Legal Zoom. Pay $150, file with the state of Delaware or whoever each year. Pay another $150. Most file as LL...
How do you get a startup funded? Depends if we're talking about a tech startup, or a non-tech startup. If you've got a promising, budding tech comp...