Author Topic: What's the TLDR on margin loans on large stock balances  (Read 6493 times)

MustacheAndaHalf

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Re: What's the TLDR on margin loans on large stock balances
« Reply #50 on: June 22, 2021, 09:40:20 AM »
...
So hey, if they are charging me $10 a month to have this account there, do they just start a deficit cash balance for me or do I need to move cash there to cover it?  Do they grab part of my AAPL dividend quarterly to cover that fee maybe?  I can imagine if I took a margin loan the would just throw it on the stack of 'negative cash' along with the interest, but if I don't take the loan for a while how does it get paid?
If you start at $0 and withdraw $5k, I think the interest is charged daily: 1.6% / 365 days comes out to $0.22 a day, roughly.  So $5,000.00 becomes $5,000.22 after one day.

I also have an IBKR Pro account, and it's a margin account.  Going past zero incurs interest.  You could, in theory, watch a margin loan grow for 10 years.  IBKR has your assets, AAPL stock, acting like collateral for the margin loan.  The more interest you accumulate, the more money you're going to pay to IBKR at some future point.

While you are running a negative balance, you can't transfer all of your AAPL stock out of the account.  I don't know if they would block the transfer, or limit the size of it - but they will hold some AAPL stock to ensure your account has a positive net value.

If AAPL stock drops very rapidly, at some point they will sell your AAPL stock to pay down the margin loan ("liquidation").  That's very unlikely, but that's also how they mitigate risk.  You might also read online about "margin call", where they warn you to deposit more assets or sell to cover your loan... or they'll do it (your margin account agreement will mention they can sell your stock to pay off the margin loan).

MissNancyPryor

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Re: What's the TLDR on margin loans on large stock balances
« Reply #51 on: July 21, 2021, 03:14:26 PM »
quoting @maizefolk
Please do come back and post what you learn from your experimental loan.
~snip

Will do.  Maybe I can throw down a few bread crumbs for my fellow noobs.   

[/quote]

An update.  TL;DR it is fine. 

This has been a little bit of a trip.  Touching the bases:

I opened the account at IBKR and arranged for an immediate transfer of some AAPL securities to fund it at the same time.  They did not hassle me about being retired (saw that on another thread about IBKR) and they accepted my application within a day. 

I transferred a large slice of AAPL which took about 3 days.  I left some shares in the Vanguard brokerage so that my basis on what I moved would always be readily available since the ticker name is still right there in the account ready to be clicked on, no need to later try to clumsily retrace that history.  Also, before transferring them I copied all the available basis information and printed it as a further safeguard.

After a couple weeks of letting everything settle out, I checked to see what the "withdrawal" portal said.  It declared that I could withdraw about $9K.  This seemed bizarre to me.  I didn't know if it was because the account was just a couple weeks old and I hadn't passed the 30 day security bar that MMM mentioned in his original post, perhaps they allow only a portion of borrowing based on how long I have been a customer.  Nonetheless, $9K got me nowhere so I just let it sit and didn't request any funds. 

I then sent a deposit of $100 over to IBKR to see what happens to cash-- do they zap that amount for the $10 monthly fee on a Pro account?  Or just take it from the AAPL quarterly dividend?  Answers from their site are elusive so I figured I would try it.  Their robots freaked out about the cash deposit and wanted to know what my net worth was again (which I had put on my original application) and how much liquidity it had.  The robots said my funds would not be available for withdrawal for some number of days.  All very robot like.  3 weeks later it is still sitting there in full so there is no indication of how the monthly fee comes out, and I don't know how IBKR's new policy change of no inactivity fees affects it, either.  I am not sure if my Pro account is now free or what.  More to learn.       

I applied for a HELOC at my bank at this point, my home is debt free.  I figured it might be handy to have available if I needed to quickly zap some money around.  3.74% rate.

Last week I checked again at IBKR and the withdrawal box said I could borrow well over $100K, it noted right up to the 50% Reg T margin.  This was not yet 30 days after opening the account but they seemed to allow it. 

I waited till the whole HELOC thing was settled and then did some math on the difference between the IBKR rate today of 1.6% vs. the HELOC 3.74% over the short term I want to borrow (just till December's annual stock selling harvest time) to decide which way to go for what I need.  Is it worth it to dick around with margin when I have the well understood HELOC available? 

I decided yes it was, partly because I am learning something new and partly because when my credit union contacted my insurance company for info they asked to be noted as a lien holder for a mortgage in case I ever draw on it.  That brought home to me that I don't want a fucking mortgage ever again and (duh) that is what a HELOC is even if only for 5 months. 

So between the lower rate, learning something new, not wanting any debt on my home, - and frankly - feeling badass that I have a huge lever to do wonderful things with the power of my money, I requested the full amount I need from IBKR today on margin.  They instantly approved it and said it will hit my bank tomorrow.  It is only 25% of the AAPL stock value so I am well within the zone of safety so there will never be a margin call.  In the meantime, AAPL's stock price has climbed upward 9% in the month+ since I started this so with that general vibe I should never have to worry about it.  Obviously I will be checking on it and will see what happens with their quarterly earnings coming the end of this month.  One intangible price paid for margin is having to keep tabs.   

Final thought-  in looking around the interwebs I found that Chuck Schwab had a better explanation of margin than IBKR, with clear statements about how the repayment works.  Nice of them.  Too bad I will never have an account with Schwab again because it was the first place we ever had an account and those sumbitches would zap us quarterly with a "minimum balance fee" of like $25 because we didn't have $25K in there, just a young married couple starting out with investing.  This was during the time when every trade was something like $30, pre-internet and pre E-Trade magic that transformed everything.  I never forgot that they charged that fee and now that I am a multi-millionaire I will never give them a nickel of it.  Just bitter I guess ;) 

https://www.schwab.com/resource-center/insights/content/margin-how-does-it-work

Paul der Krake

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Re: What's the TLDR on margin loans on large stock balances
« Reply #52 on: July 21, 2021, 05:19:15 PM »
Are you telling me there was a time when you couldn't trade stocks for free on your phone? What did you guys do on the toilet back then?

maizefolk

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Re: What's the TLDR on margin loans on large stock balances
« Reply #53 on: July 21, 2021, 07:50:48 PM »
I really appreciate the update and firsthand experience @MissNancyPryor. Thank you!

Simpli-Fi

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Re: What's the TLDR on margin loans on large stock balances
« Reply #54 on: July 21, 2021, 09:37:56 PM »
@MissNancyPryor awesome experiment and mad props to you for giving this a go.

Keep us posted on the fees at IBKR

ChpBstrd

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Re: What's the TLDR on margin loans on large stock balances
« Reply #55 on: July 22, 2021, 08:31:31 AM »
Agreed. Thanks @MissNancyPryor. I hope you make another fortune and tell the story here.

Iím curious if there are options plays that yield a nearly risk-free return at these low margin rates. For example, mortgage REIT AGNC is $16.26 and yields $0.12 per month (8.76%). One could buy 100 shares and sell a call expiring in 17 months at the $10 strike, roughly the 2020 low, at $6.85. Thus you have (16.26-6.85=) 9.41 per share invested in a position that will pay you $0.12/month in dividends and eventually be sold for $10. Based on the decay of other calls, it looks like youíd get at least 15 months worth of dividends before it made sense for your counterparty to exercise the call and buy your shares. That is when the time value on the option is less than the next dividend. So if you are in the trade for 15 months, you collect $1.80 in dividends. Then when your shares are assigned for $10 you make (10-9.41=) $0.59 in LT capital gains. So itís a return of ($1.80+0.59=) $2.39 on an initial outlay of $9.41. Thatís 25.4% in 15 months, with losses only possible in a scenario where AGNC falls farther than it did in March 2020 and stays there. That definitely covers the margin interest.

MustacheAndaHalf

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Re: What's the TLDR on margin loans on large stock balances
« Reply #56 on: July 22, 2021, 09:40:43 AM »
Are you telling me there was a time when you couldn't trade stocks for free on your phone? What did you guys do on the toilet back then?
If only it was that quick.  It took a long time to chisel stock orders on stone tablets.

Rubic

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Re: What's the TLDR on margin loans on large stock balances
« Reply #57 on: July 25, 2021, 06:02:45 AM »
Are you telling me there was a time when you couldn't trade stocks for free on your phone? What did you guys do on the toilet back then?
If only it was that quick.  It took a long time to chisel stock orders on stone tablets.

This wasn't such a bad thing.

I started investing at an early age, when you had to execute your orders
through a human broker. This was prior to the decimalization of prices,
so quotes would show up in fractions of 1/2, 1/4, 1/8.

The advantage is that you tended to think in terms of years, or even
decades of your holdings.  Philip Fisher advised investors not to pay
too much attention to their monthly brokerage statements (which obviously
weren't online) because the montly fluctuations could engender irrational
behavior.

Getting back to the main topic. As I've mentioned up thread, I think
it's best to avoid margin loans. There are a number of other pitfalls
to also avoid, but that's at the top of my checklist.

I think it's best for the same reason I advise fixed gear cyclists from
riding brakeless. It can be done, but there are already enough inherent
risks in cycling (I've been present at 3 cycling accidents that resulted
in rider deaths), that it doesn't make sense to increase your risk.

For the people who are in favor of margin loans: Have you experienced
a friend or relative who got wiped out due to a margin call?  It's a
sobering experience.

-Rubic

MissNancyPryor

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Re: What's the TLDR on margin loans on large stock balances
« Reply #58 on: July 25, 2021, 09:17:26 AM »
I would never use margin to gamble with the house's money on some hot stock name, hoping for a run up.  There are enough stories out there of people hoping for lightning strikes on Bitcoin and GME only to find themselves many thousands in debt.  No one should be doing that, IMO.   

My purpose is to use this as MMM first introduced - for short term access to a large amount of money without selling stock and triggering a big tax bill, for a small fee of 1.6%.  I could see drawing on this occasionally when a huge opportunity comes up just as MMM described, being able to buy a house for cash instantly is an amazing concept and is definitely aligning with the idea of working from a position of strength.  I have the money in my brokerage account but I can't tap it without pain, so I am using this margin advantage to slide my wealth around without taking a huge tax hit for it.  Knowing that the margin loan needs to get paid back as quickly as possible has to be part of the plan whenever I draw from it.   

For me it comes down to the idea that I have a huge amount of wealth and it is becoming this ridiculous pot of gold that I have struggled to pry the top from.  I have kept track of my allocation and started at 7% cash to 93% stock, but now keeping 7% cash is a stupid amount of uninvested wealth.  I am glad to go through this small test run to see how it works and make big things happen quickly, knowing I can quickly ramp up cash for anything I need or want to do.

MMM's post sets exceedingly conservative guidelines in using only 25% of a solid, diversified portfolio to keep the margin from ever being called.  I did that with only one name, AAPL, and then have a HELOC ready on the side if it suddenly started to fall in price.  Given how far it has to fall for a margin call I am certain there would be time to cover it (now at $148, it would need to get to $74 to trigger the call, I would move money over from the HELOC if it fell below $100).     

Financial.Velociraptor

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Re: What's the TLDR on margin loans on large stock balances
« Reply #59 on: July 25, 2021, 12:08:53 PM »
I think it has gone unmentioned that "regulation-T" margin isn't the only option at IB.  You can also apply for "Portfolio margin" if your taxable account is at least 110,000 USD in net liquidation value.  This allows up to 5x leverage against an indexed or portfolio of stable large caps.  Individual holdings deemed more risky have their marginability reduced (sometimes without warning), sometimes to zero.  I used this when I first went FIRE.  I was "super-skinny  FIRE" with a withdrawal rate of a little over 10%.  I was fed up and plan was to barista FIRE.  I levered up 2.5:1 on high yield closed end funds (this was 2012 and I felt pretty confident the Fed had the market's back) and there was a mad dash to chase  yield in the market at the time.  My holdings increased over 50%, while kicking off another 40%+ in distributions versus an unleveraged portfolio and I sold near the top.

Rebalanced, extinguished 90% of the margin loan, and traded options around a portfolio that was now closer to 7% WR.   Cash earnings on a mREIT heavy portfolio slowly brought the margin loan back to zero.  I have moved back to Reg-T margin and hope to never lever up again.  It was a desperate move in a unique environment that even I expected to require going back to work part time.  The markets were very kind and I was able to stay funemployed.   If I had to do it again, I would have taken the extra step of getting the barista job (or more likely stocker at Costco which pays pretty decent for PT/unskilled and is flexible).  Current withdrawal rate is 5.49% and falling.  Raising cash ala Taleb to deploy when the storm finally arrives.  Looking at SPSB as a safe place to park cash with near inflation matching yield.  Plan to sell everything in my HSA account (about 13,000) and hold cash (SPSB) until next 50% pullback, then pivot to UPRO until market sets new all time high, rinse, repeat.  Holding 39k in just straight cash in taxable and still raising cash.  It's a drag on performance but I see more risk than reward in the market right now.

I'll save the ^VIX shenanigans for when it is more on topic.

Note: if you go portfolio margin, this requires a PRO account $10/month, no live pricing data unless you pay more for it, and all trades will be under the old commission structure.  The only "free" accounts with free data are reg-T.

Kevin Aster Tin Obin

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Re: What's the TLDR on margin loans on large stock balances
« Reply #60 on: July 25, 2021, 07:22:01 PM »
Hi financial VelociRaptor,

Can you share more about CEF or maybe there is another thread where you go into more detail, but google search says they are risky. Would You propose to use them for new cash that needs a low risk investment in taxable account?

Financial.Velociraptor

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Re: What's the TLDR on margin loans on large stock balances
« Reply #61 on: July 26, 2021, 08:30:06 AM »
Hi financial VelociRaptor,

Can you share more about CEF or maybe there is another thread where you go into more detail, but google search says they are risky. Would You propose to use them for new cash that needs a low risk investment in taxable account?

Not all CEFs are created equal.  You will rarely find one that has been around for more than 10 years that has lost money on a total return basis.  That is survivorship bias as bad CEFs get closed by the banks that run them.  I've had good success with IQI and NEA as closed end municipal bond funds since 2015.  I've had less success but still a positive return with good yield in JPS in the preferred space.  PDI and PDT have been good to me in the income space.

You only want to buy when you can get in a discount to NAV.  Depending on your risk tolerance, you may want to hold some offsetting cash for any leverage in the fund.  And of course most Boglehead types avoid CEFs like the plague because of the fees, which are quite a lot higher since the typical CEF is leverage AND actively managed, which to my mind makes sense only in fixed income type investments where there are no or few quant bots. 

Dgmp

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Re: What's the TLDR on margin loans on large stock balances
« Reply #62 on: July 26, 2021, 09:29:34 AM »
Thanks for all the info MissNancyPrior.  Iím ashamed to say that even though I started this thread, I havenít gotten around to this yet!

Qq for you.  Did you lose the basis when you do the asset transfer?  It then resides in IBR with no basis, so if you sold, youíd have to manually do your taxes for these lots?

MissNancyPryor

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Re: What's the TLDR on margin loans on large stock balances
« Reply #63 on: July 26, 2021, 10:01:22 AM »
Thanks for all the info MissNancyPrior.  Iím ashamed to say that even though I started this thread, I havenít gotten around to this yet!

Qq for you.  Did you lose the basis when you do the asset transfer?  It then resides in IBR with no basis, so if you sold, youíd have to manually do your taxes for these lots?

You do not lose the basis but the record keeping is the thing that proves it at tax time in case IBKR doesn't provide accurate 1099 info if I ever do sell.  I don't know if IBKR keeps good records and keeps the basis info from Vanguard or not, so I printed everything out before making the move as well as keeping a bit of AAPL still in VG so I could click on the name and see its history without fuss. 

When I transferred everything out of Scottrade back in 2017 Vanguard was pretty good and was able to get most of the old info.  Anything missing I was able to look at my Quicken and old paper statements to fill the gaps at tax time and I learned that lesson for this move. 

As further education I was tempted to transfer some AAPL shares back to VG at some point and watch the basis go with it as well as test how much hassle IBKR gives me about moving securities out.  I envision one day closing the IBKR and keeping everything at VG after playing around with this, and if they ever change their policies or jack up their rates I will be toodle-looing from the party. 
 

MissNancyPryor

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Re: What's the TLDR on margin loans on large stock balances
« Reply #64 on: August 13, 2021, 06:07:14 PM »
Update:  It appears that all expenses for interest and monthly account fees are zapped from the dividend - AAPL paid out 8/12.  The dividend more than covers the low interest and fees, and any excess is simply applied against the margin loan balance.   

The "transactions" window for my account shows exactly none of this.  There is no place I can find that shows the ticking along of interest, the arrival and absorption of the dividend, a monthly fee record, nothing.  I really hate that. 

Hopefully it will all appear on the statement at the end of August.  I only know what has occurred so far because I have been doggedly tracking this account and the daily interest and fees in my experiment.   

less4success

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Re: What's the TLDR on margin loans on large stock balances
« Reply #65 on: August 13, 2021, 06:17:22 PM »
Qq for you.  Did you lose the basis when you do the asset transfer?  It then resides in IBR with no basis, so if you sold, youíd have to manually do your taxes for these lots?

You do not lose the basis but the record keeping is the thing that proves it at tax time in case IBKR doesn't provide accurate 1099 info if I ever do sell. ...

I did an ACATS transfer of covered (basis reported to IRS) shares from my (taxable) Vanguard brokerage account to Interactive Brokers. The shares showed up in a week or so and the basis took another few weeks. Plus all the time I spent trying to find basis info on IB's horrible web site (you have to use their Tax Optimizer Java app to find basis--yes, it's a huge pain).

Update:  It appears that all expenses for interest and monthly account fees are zapped from the dividend - AAPL paid out 8/12.  The dividend more than covers the low interest and fees, and any excess is simply applied against the margin loan balance.   

The "transactions" window for my account shows exactly none of this.  There is no place I can find that shows the ticking along of interest, the arrival and absorption of the dividend, a monthly fee record, nothing.  I really hate that.

This pretty much sums up why I'm disliking Interactive Brokers so far -- they have all the info somewhere in their systems, but it's impossible to find. Honestly, if they hadn't been around so long, I'd think they're doing something shady and trying to hide it ;)

MissNancyPryor

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Re: What's the TLDR on margin loans on large stock balances
« Reply #66 on: August 13, 2021, 08:43:11 PM »
Qq for you.  Did you lose the basis when you do the asset transfer?  It then resides in IBR with no basis, so if you sold, youíd have to manually do your taxes for these lots?

You do not lose the basis but the record keeping is the thing that proves it at tax time in case IBKR doesn't provide accurate 1099 info if I ever do sell. ...

I did an ACATS transfer of covered (basis reported to IRS) shares from my (taxable) Vanguard brokerage account to Interactive Brokers. The shares showed up in a week or so and the basis took another few weeks. Plus all the time I spent trying to find basis info on IB's horrible web site (you have to use their Tax Optimizer Java app to find basis--yes, it's a huge pain).

Update:  It appears that all expenses for interest and monthly account fees are zapped from the dividend - AAPL paid out 8/12.  The dividend more than covers the low interest and fees, and any excess is simply applied against the margin loan balance.   

The "transactions" window for my account shows exactly none of this.  There is no place I can find that shows the ticking along of interest, the arrival and absorption of the dividend, a monthly fee record, nothing.  I really hate that.

This pretty much sums up why I'm disliking Interactive Brokers so far -- they have all the info somewhere in their systems, but it's impossible to find. Honestly, if they hadn't been around so long, I'd think they're doing something shady and trying to hide it ;)

Yes, their site is really awful and lacks basic information.  Too cool for school.  Because of this at some point I will take out the bulk of my shares and leave them with the piddling few AAPL bits and take the rest back home to Vanguard, reversing my current set up.  I am supposing with my foot in the door keeping that account open it would be easy to transfer them back and forth whenever I want to take advantage of their margin rates and not have to hassle re-opening an account.  Using them as my daily driver long term brokerage?  Nope, they can keep it based on what I have seen so far.     

MustacheAndaHalf

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Re: What's the TLDR on margin loans on large stock balances
« Reply #67 on: August 14, 2021, 10:05:45 AM »
Hopefully it will all appear on the statement at the end of August.  I only know what has occurred so far because I have been doggedly tracking this account and the daily interest and fees in my experiment.
I've never gotten a monthly statement, or found it on their website - what did you do to get monthly statements?

I've been relying on the reports screen, which can tell YTD realized and unrealized gains.  And I found a place for statements, but I think I have to setup a query of some kind.  IBKR isn't the best for making information easy to find.

Financial.Velociraptor

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Re: What's the TLDR on margin loans on large stock balances
« Reply #68 on: August 14, 2021, 01:04:08 PM »
The IBKR month end statement does not include the breakdown you are looking for. 

MissNancyPryor

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Re: What's the TLDR on margin loans on large stock balances
« Reply #69 on: August 14, 2021, 01:54:14 PM »
I did find everything under the Reports option and chose YTD on the drop down and selected pdf display.  I could print that pdf when I want to mark time and track on paper.

It has everything as a line item including my initial shares and small cash deposit, my margin withdrawal, the dividend, a lump sum for interest, and something called "payment in lieu of dividends" with a small credit to me.  No monthly fee is noted. 

Yeah, this is going to suck.  Good thing they are cheap for this loan which makes the inconvenience and uneasy feelings worthwhile but there is no reason I would send any more of my money over to them.