Author Topic: What's the TLDR on margin loans on large stock balances  (Read 11219 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.

I’m 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 you’d 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 it’s a return of ($1.80+0.59=) $2.39 on an initial outlay of $9.41. That’s 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.  I’m ashamed to say that even though I started this thread, I haven’t 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, you’d 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.  I’m ashamed to say that even though I started this thread, I haven’t 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, you’d 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, you’d 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, you’d 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.

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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.     

theoverlook

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Re: What's the TLDR on margin loans on large stock balances
« Reply #70 on: February 24, 2022, 07:30:55 AM »
How has your margin loan worked out for you so far?

I'm looking at a real estate purchase that would need to be in cash, so I would need to either liquidate stocks or do a margin loan. I have $580k in a taxable account (well, at least as of the end of day yesterday, we'll see after the market opens today..) and the deal will likely be around $250k. The "Maintenance margin" at IB is 25% - I understand that to mean on a $580k equity value you could carry a total of $2.3m which is nuts to me. Do I have that right? "Initial margin" is listed as 100% which I understand to mean with a $580k balance I could take out $580k in margin loan. I just want to be clear on that so I know how "safe" a $250k margin balance would be with my equity balance.

MissNancyPryor

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Re: What's the TLDR on margin loans on large stock balances
« Reply #71 on: February 24, 2022, 09:37:14 PM »
How has your margin loan worked out for you so far?

I'm looking at a real estate purchase that would need to be in cash, so I would need to either liquidate stocks or do a margin loan. I have $580k in a taxable account (well, at least as of the end of day yesterday, we'll see after the market opens today..) and the deal will likely be around $250k. The "Maintenance margin" at IB is 25% - I understand that to mean on a $580k equity value you could carry a total of $2.3m which is nuts to me. Do I have that right? "Initial margin" is listed as 100% which I understand to mean with a $580k balance I could take out $580k in margin loan. I just want to be clear on that so I know how "safe" a $250k margin balance would be with my equity balance.

In this January 2021 post MMM advised not borrow more than that "Reg T Margin":
https://www.mrmoneymustache.com/2021/01/29/margin-loan-ibkr-review/

MMM indicated in the post that the brokerage would only allow borrowing up to 50% of the value of shares and he recommended doing 25% to be extra safe.  If you borrowed anything close to the actual value of your shares they could instantly sell your stock out from under you on a down day, without notifying you, to make sure they had their magic cushion.  I found far better info about how it works outside of IBKR's site than anything I read there, but I also was in that extra-safe camp and didn't approach 50% so I can't give you graduate-level info.

For me, I deposited $250K of AAPL and was immediately told I had the "buying power" of $700K.  Today the same shares are worth much more due to stock price increases but my buying power is the same, maybe even a skosh less.  I am sure there is an algorithm that determines how much they will let you borrow based on how solid they determine your shares to be and whether Russia invaded Ukraine this week.  I admit I am not sure what "buying power" means since they want you to keep that Reg T margin covered.  Their information about how it works is pretty poor.     

My story is (hopefully) almost done with IBKR.  I made my deposit of shares last June and immediately borrowed $60K on margin.   I then paid that back in a lump sum in late December.  I was charged confusing amounts at different times all through my borrowing window, small piddling bites of interest that were deducted from the dividends.  Their website is pure garbage so it was never clear how the fees worked though the overall amounts ended up being what I expected based on the rates they posted.       

The crap part is that once I cleared the loan in December I immediately ordered a transfer of my original shares and closure of my IBKR account and they refused to do it until I waited 60 DAYS.  I presume they wanted to make sure my payment was legit or something, who knows, they never explained it but just said no.  That means I am still technically a customer of IBKR before my transfer goes through this week.  I had Vanguard pull the shares and cash funds back to them rather than trying to get with anyone at IBKR to push them.  I didn't trust IBKR to arrange for it and even finding the right forms on the site was trouble.     

So the experiment is nearly done.  Bottom line it was great to get $60K for 6 months for less than $500 in interest.  I doubt I will need to use this again but will keep it in mind if there is something extraordinary going on. 

It was worth it, but not easy.         

theoverlook

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Re: What's the TLDR on margin loans on large stock balances
« Reply #72 on: February 25, 2022, 08:45:37 AM »
Thank you very much for the detailed response! I'm still trying to wrap my head around how the balance percentage is calculated. If I have $580,000 in equities in this account, in my case all VTI, would a 25% maintenance margin balance then be $145,000? Or since I'm taking it out in cash rather than buying equities within the account would it be lower than that?

Since the property I'm hoping to purchase would be about $250,000, I can't fund a purchase with margin and keep it below 25%. Maybe we're not quite ready for a margin purchase this big. It would allow us to put off about $20,000 in taxes at a cost of about $4,500 in interest, but the risk may be too great for us. It's possible we'd be better off paying the taxes.

MissNancyPryor

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Re: What's the TLDR on margin loans on large stock balances
« Reply #73 on: February 25, 2022, 12:51:03 PM »
In your case perhaps paying some interest toward funds borrowed on a home equity line of credit to make up the total cost of the real estate would be better than paying tax on sales of stock if your basis is low (my basis is very low on the AAPL so I was in for a bad tax hit if I sold it).  You would need to do the math to be sure.   

SwordGuy

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Re: What's the TLDR on margin loans on large stock balances
« Reply #74 on: February 25, 2022, 02:35:25 PM »
Quote
What's the TLDR on margin loans on large stock balances?

Honestly, I think for most people, the TLDR answer is "Don't".

If you don't REALLY know what you're doing, you can lose your fortune. 

The problem with knowing whether you REALLY understand what you're doing is much like knowing whether you're a Dunning-Kruger club member.   You may not find out until you've committed to a course of action.

MustacheAndaHalf

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Re: What's the TLDR on margin loans on large stock balances
« Reply #75 on: February 26, 2022, 06:11:23 AM »
The crap part is that once I cleared the loan in December I immediately ordered a transfer of my original shares and closure of my IBKR account and they refused to do it until I waited 60 DAYS.  I presume they wanted to make sure my payment was legit or something, who knows, they never explained it but just said no.
They didn't explain why?  I don't know of any payment that takes 60 days to clear, so I'm guessing they just claimed it's their policy.  Yet that sounds like a policy that would lose in court.

For many years, a major broker rounded off pennies of interest and kept them.  They lost that battle in court, and were forced to pay back interest and stop the practice (I don't recall if there were penalties).  This 60 day policy sounds similar to me, since it's your money - not theirs.

MissNancyPryor

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Re: What's the TLDR on margin loans on large stock balances
« Reply #76 on: February 26, 2022, 02:23:23 PM »
The crap part is that once I cleared the loan in December I immediately ordered a transfer of my original shares and closure of my IBKR account and they refused to do it until I waited 60 DAYS.  I presume they wanted to make sure my payment was legit or something, who knows, they never explained it but just said no.
They didn't explain why?  I don't know of any payment that takes 60 days to clear, so I'm guessing they just claimed it's their policy.  Yet that sounds like a policy that would lose in court.

For many years, a major broker rounded off pennies of interest and kept them.  They lost that battle in court, and were forced to pay back interest and stop the practice (I don't recall if there were penalties).  This 60 day policy sounds similar to me, since it's your money - not theirs.

"That's not a mundane detail Michael!"

IBKR did charge me another $45 since December while I have been waiting (maybe carry over interest or monthly fees?  They don't ever say how the fees work, just ding ding ding nibbling odd dollar fees charged throughout).  IBKR gave zero information about why they were holding my account - it was the Vanguard rep who told me the transaction was stalled by IBKR but also couldn't say why.  My account is still not closed as of Friday even though the 60 days expired more than a week ago now and VG still shows the transaction in progress. 

I now get to spend time on the phone next week with someone to see what the latest issue is, good thing I am retired.

Yeah, IBKR sucks.  I saved maybe $1000 in interest by using them vs. using a HELOC and of course many thousands in taxes were saved by not selling AAPL.  I experimented and got the benefit of a cheap loan and also learned that they are not an option for holding my wealth.  Mission accomplished.         

MustacheAndaHalf

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Re: What's the TLDR on margin loans on large stock balances
« Reply #77 on: February 26, 2022, 04:36:48 PM »
Have you paid off your margin loan in full?  Might be worth checking your account and calling IBKR to confirm that.  If you still owed them money, their blocking transfers would make sense.

My experience with IBKR has been much better than yours.  I opened an account there in 2020 to buy ETFs that Vanguard wouldn't allow me to purchase.  Their low margin loan rates were also part of the draw.  Having learned to use their Trader Workstation program on my laptop, it's actually my favorite way to trade call options (probably doesn't apply to most people).

If you need to lookup returns or info on their website, though, they do suck.  Somewhere they have the interest rate for each stock (if you short it), but I forgot the obscure corner where that's located.  I sometimes try to find cost basis information in one place, but tend to give up and look on the detail screen of each holding and work backwards from the listed gains and current value.

My favorite thing is their security, which I consider better than other brokers.  Most brokers are satisfied with SMS messages, which aren't secure.  Vanguard allows a YubiKey for two factor authentication, which is a great step up from SMS.  But IBKR beats them all, allowing those with $500k at IBKR to request a "security key", which is a physical device the size of a credit card.  It's never connected to the internet, so there's nothing online to hack.  It uses a challenge/response model that means if someone managed to spy on my typing, they still couldn't use it to hack my account (they would have a different challenge, and require a different response).  So from a security standpoint, and for low margin rates, I still keep money at IBKR.

But if you want to avoid IBKR, maybe you could use Schwab or Fidelity.  Load up IBKR's margin rates, and ask Schwab/Fidelity to match, and see what they can do.  Then you have $0/trades and low margin rates without being at IBKR - that could a good alternative if you need margin again in the future.

DaTrill

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Re: What's the TLDR on margin loans on large stock balances
« Reply #78 on: February 27, 2022, 01:56:36 PM »
This is a 100% sure way to lose your money.  All margin agreements allow the broker to make any security at any time for no reason non-marginalable and force anyone to pay off their loan instantly.  Risk managers will move large positions in margin accounts to be unmarginable securities to minimize risk rather than move hundreds of securities to unmarginable. 

Terrible idea promoted by idiots.  Will always result in major losses.     

MOD NOTE: Insults not needed. Stating your case with reasons is sufficient. Cheers!
« Last Edit: February 28, 2022, 02:20:42 PM by arebelspy »

MustacheAndaHalf

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Re: What's the TLDR on margin loans on large stock balances
« Reply #79 on: February 28, 2022, 03:16:01 AM »
Terrible idea promoted by idiots.
Reported to the mods, hopefully you get warned or banned.


This is a 100% sure way to lose your money.  All margin agreements allow the broker to make any security at any time for no reason non-marginalable and force anyone to pay off their loan instantly.  Risk managers will move large positions in margin accounts to be unmarginable securities to minimize risk rather than move hundreds of securities to unmarginable. 
... Will always result in major losses.   
You're not going to provide references or evidence for that claim, are you?

So if anyone makes money on margin, your claim that it is "a 100% sure way to lose your money" must be incorrect.  I went on margin at the start of the week when Covid-19 cases dropped in the US for the first time, and it was the best week in almost 40 years.  I made a nice profit on the index funds I borrowed, so a claim this "will always result in major losses" also seems to be incorrect.

Even worse, the current discussion was not about buying equities on margin.  It was about using the margin loan to pay for non-stock items, and paying it back months later.  If I can appeal to authority here, if margin "will always result in major losses", maybe you should ask why Mr Money Mustache himself did it?
https://www.mrmoneymustache.com/2021/01/29/margin-loan-ibkr-review/

DaTrill

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Re: What's the TLDR on margin loans on large stock balances
« Reply #80 on: March 01, 2022, 01:04:00 PM »
Terrible idea promoted by idiots.
Reported to the mods, hopefully you get warned or banned.


This is a 100% sure way to lose your money.  All margin agreements allow the broker to make any security at any time for no reason non-marginalable and force anyone to pay off their loan instantly.  Risk managers will move large positions in margin accounts to be unmarginable securities to minimize risk rather than move hundreds of securities to unmarginable. 
... Will always result in major losses.   
You're not going to provide references or evidence for that claim, are you?

So if anyone makes money on margin, your claim that it is "a 100% sure way to lose your money" must be incorrect.  I went on margin at the start of the week when Covid-19 cases dropped in the US for the first time, and it was the best week in almost 40 years.  I made a nice profit on the index funds I borrowed, so a claim this "will always result in major losses" also seems to be incorrect.

Even worse, the current discussion was not about buying equities on margin.  It was about using the margin loan to pay for non-stock items, and paying it back months later.  If I can appeal to authority here, if margin "will always result in major losses", maybe you should ask why Mr Money Mustache himself did it?
https://www.mrmoneymustache.com/2021/01/29/margin-loan-ibkr-review/

Please read your margin agreement. 

https://www.schwab.com/resource-center/insights/content/margin-how-does-it-work#:~:text=Because%20margin%20uses%20the%20value%20of%20your%20marginable,in%20value%2C%20your%20buying%20power%20decreases.%20Margin%20interest

I've done thousands of margin calls for "investors" following this "strategy".  Good luck if you fall into this trap.  Maybe it will be different this time.   

From above article. 
 
Important details about margin loans

Your brokerage firm may initiate the sale of any securities in your account without contacting you, to meet a margin call.
Your brokerage firm may increase its “house” maintenance margin requirements or remove specific securities from the marginable list at any time and is not required to provide you with advance written notice.
You are not entitled to an extension of time to meet a margin call.


MustacheAndaHalf

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Re: What's the TLDR on margin loans on large stock balances
« Reply #81 on: March 01, 2022, 01:37:33 PM »
You claimed the following:

This is a 100% sure way to lose your money ... Will always result in major losses.     
That is the claim I dispute, not the wording of a margin agreement.  Do you stick by your "100% sure" and "always result" comments above?

theoverlook

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Re: What's the TLDR on margin loans on large stock balances
« Reply #82 on: March 03, 2022, 09:52:22 AM »
I've done thousands of margin calls for "investors" following this "strategy".  Good luck if you fall into this trap.  Maybe it will be different this time.   

That's a pretty extraordinary claim and is hard to believe. How have you personally "done" thousands of margin calls? Are you employed by a major brokerage?

MustacheAndaHalf

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Re: What's the TLDR on margin loans on large stock balances
« Reply #83 on: March 03, 2022, 11:25:03 AM »
I've done thousands of margin calls for "investors" following this "strategy".  Good luck if you fall into this trap.  Maybe it will be different this time.   

That's a pretty extraordinary claim and is hard to believe. How have you personally "done" thousands of margin calls? Are you employed by a major brokerage?
Obviously, the "100% sure" you'll lose money claim is an exaggeration, but DaTrill brought up a lot of good points. From this thread, it seems like people aren't reading their margin agreements and they don't have a good understanding of how/why quickly things could go south.
I've made a profit using margin twice.  So to me both (not "an") claims are false:
"100% sure way to lose your money" and "Will always result in major losses".  Should I trust a source when I have personal experience the information is wrong?  And if someone is willing to post some incorrect information, what does it say about their other statements, which are harder to verify?

Margin calls do not "force anyone to pay off their loan instantly" (also from that earlier post), but rather give clients time to add assets.  A later post mentions no "extension of time", which hints at "instantly" might also have been an exaggeration.  To me it's not worth trying to glean the fact from the fiction when another poster hasn't tried to do that themselves.

ChpBstrd

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Re: What's the TLDR on margin loans on large stock balances
« Reply #84 on: March 03, 2022, 02:02:20 PM »
I'm playing with a margin loan on a SMALL stock balance in IB.

$4300 in OHI, which yields 9.5%. $1845 of this is borrowed (43% leverage). The leverage amplifies this nursing home REIT's dividend to 13.5% of my investment, before the margin interest expense. The current maintenance margin is 25%.

I'm mostly playing this game to explore the feasibility of a leveraged portfolio in retirement, or using a leveraged sub-portfolio to generate income while bridging the time for the rest of a portfolio to reach a FIRE number.

DaTrill

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Re: What's the TLDR on margin loans on large stock balances
« Reply #85 on: March 06, 2022, 02:33:05 PM »
Please read OP.  This is a 100% sure way to get called out on a margin loan and experience major losses.  Borrowing against any stock for long time period is an application of this statistical critique. 

https://www.youtube.com/watch?v=91IOwS0gf3g

I have also seen the downside of this strategy in practice by selling out thousands of accounts with this exact strategy.  This strategy is the equivalent of playing Russian Roulette claiming after one pull of the trigger "See I didn't die" as anyone with even a simple understanding of stats knows how it will end in 100% of the individuals doing this.  Anyone who continues to borrow will experience the same ending anyone who continues to pull the trigger, yes 100%. 

In above stats critique, the added issue is that the rules can change at any time and there is nothing the investor can do to insure against this change.  Please read your full margin agreement.         

boarder42

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Re: What's the TLDR on margin loans on large stock balances
« Reply #86 on: March 06, 2022, 04:21:09 PM »
Please read OP.  This is a 100% sure way to get called out on a margin loan and experience major losses.  Borrowing against any stock for long time period is an application of this statistical critique. 

https://www.youtube.com/watch?v=91IOwS0gf3g

I have also seen the downside of this strategy in practice by selling out thousands of accounts with this exact strategy.  This strategy is the equivalent of playing Russian Roulette claiming after one pull of the trigger "See I didn't die" as anyone with even a simple understanding of stats knows how it will end in 100% of the individuals doing this.  Anyone who continues to borrow will experience the same ending anyone who continues to pull the trigger, yes 100%. 

In above stats critique, the added issue is that the rules can change at any time and there is nothing the investor can do to insure against this change.  Please read your full margin agreement.       

When you make absolute statements your credibility is gone. Not that you have much around here but margin can be used successfully more often than not historically. So to say it's 100% like shooting a bullet into your head is statistically wrong.

MustacheAndaHalf

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Re: What's the TLDR on margin loans on large stock balances
« Reply #87 on: March 06, 2022, 05:00:01 PM »
Margin calls do not "force anyone to pay off their loan instantly" (also from that earlier post), but rather give clients time to add assets.

Are you sure about this (specifically for Interactive Brokers)?

From IBKR (https://ibkr.info/node/199):

Quote
In the event of a margin violation, the account is subject to automatic liquidation on a real-time basis.  Liquidations are accomplished with market orders, and any/all positions in the account can be liquidated.

I thought this was IBKR's whole competitive advantage that allows them to offer lower rates than other brokers (to everyone, without negotiating special rates individually).

And an anecdote from Reddit: https://www.reddit.com/r/interactivebrokers/comments/lqspwx/ibkr_autoliquidated_some_of_my_positions_at/

Edit: From IBKR's customer agreement, it sounds like automatic liquidation is technically distinct from a margin call, so perhaps the confusion is just due to imprecise terminology?
I never said IBKR uses margin calls.  As you're discovering, they don't.

The earlier posts mentioned a "margin call" specifically, which has precise meaning.
https://www.investopedia.com/terms/m/margincall.asp

Where is the "confusion" you describe?  Are you saying someone who said they are a margin clerk was confused about the meaning of "margin call"?

 

Wow, a phone plan for fifteen bucks!