I think of buying 10k of stock XYZ and using 5k of my own cash + 5k from IB.
Now my question:
How does this actually work?
Can I simply have 5k in cash and the buy 100 stocks of XYZ at 100 USD stock price (total 10k)?
Or would it also work to buy 100 additional shares of XYZ to 100 shares of XYZ that I already have in my portfolio?
Will the margin that I can have be calculated on my current portfolio s net liquidation value or on the cash I hold at the moment I want to establish the position with the loan?
I saw there are 2 models on IB:
risk based and rule based.
I guess for standard margin trading the rule based system applies?
And where can I see if I have an account that allows margin trading or not?
It is calculated with the margin requirements of assets you own and assets you want to buy. But when you buy, the initial margin requirement is the relevant one and not the maintenance margin requirement.
If you like a long answer, Iâd recommend reading Jason Zweigâs book *The Little Book of Safe Money", especially on leverage.
For a shorter answer, Jason Zweig has a WSJ article on âBorrowing Against Yourselfâ. Itâs behind the Journalâs paywall â I found the two paragraphs best for summaring the content:
When you use margin, you merely appear to be borrowing from yourself. Instead, you are borrowing from one of the most unstable and unreliable lenders imaginable: Mr. Market, that personification of investors everywhere, sometimes euphoric, sometimes miserable, never predictable.
If Mr. Market trashes your investments in a sudden panic, your margin debts may be âcalled,â forcing you to sell some of your assets to sustain the minimum account values you committed to under the terms of the loan. By definition, margin calls are most likely to come just as the prices of the holdings you borrowed against are in free-fall.
For a more recent reference point, Iâd mention the most recent market crash and margin calls that even caused portfolio holders to have to sell so-called safe securities to avoid selling their risky assets at the worst time possible.
Nevertheless, it will not harm you to âstudyâ how the mechanism work without putting real money on the tableâŠ
Start with the IB guide and be sure you fully understand it. Run some simulation with a spreadsheet in order to âplayâ with real numbersâŠ
Start analyzing RegT margin, whose requirements are fix and easier to understand (initial margin 50%, maintenance margin 25%)
Both your examples should work as the ratio between âequityâ and âequity + loanâ in order to buy should be >= 50% (where âequityâ is the total value of shares held and âequity + loanâ what âyour belongingsâ are worthâŠ)
Below a possible evolution of the situation until the triggering of a margin call
âIn order to finish first, you must first finishâ - someone clever
Leverage should be used sporadically with the intent to cover the debt relatively soon. Not as a long term deal because the risk of margin call becomes too great.
My advice: donât put your portfolio at risk of a margin call (forced selling). Using a little bit of leverage (maybe 10-20%) for a short period of time is fine in my opinion (up to 1-2 years), because you might want to take advantage of some opportunities (for instance, during the March panic). But even when youâre conservative, there is the risk that you get addicted to essentially free money and increase your leverage more and more. Then a crash occurs and youâre in a really bad position and worst of all, you canât buy at these distressed prices because you have to make up for the debt.
For what itâs worth: my leverage ration is about 1.08 at the moment. I took advantage of the March panic by buying more stocks than my savings allowed. But I am reducing my margin every month and in December it will be completely gone. I would never use leverage to regularly (every month) buy stocks at regular prices and keep my leverage ratio constant.
Margin loan is as any other loan. Never take one if you cannot pay it back easily and safely.
With interest rates at 0%, it is obviously very tempting. Just keep in mind that when the rates go up, the stocks go down. A potential financial catastrophe may be around the corner.
Iâm not afraid to admit it, Iâm on margin. I went as far as 1.7 in March. Now is about time to go back to 1.0.
Hi @cyberhigh in my humble opinion the answers have been quite patronising. Of course, you should read, learn and know what you are doing before starting. After you make sure of that, it is my suggestion you try it out. 5k is not the world after all and if you take a hit Iâm sure you can recover.
Let us know how it goes with IB as I have the same intentions as you in the future.
This is interesting. Do you have any preference for the stock outlook (bullish/bearish) or is it all the same to you? Iâd also be interested in what your profit % from the ITM calls would typically be. Obviously the premium has to be fat enough to cover the difference between the strike price and the current share price - but how fat exactly
It let us understand that he can borrow up to 50% of itâs capital before his positions are sold and so he uses only 25%.
Iâm actually in a very similar case as my margin is called at 25% so I use only 12.5% max and I have cash on ânon leveraged positionsâ in other portfolios + emerengy funds I could use in case âŠ
Anyways my question is why does IBKR only let me use 25% of margin and not 50% ? Did something changed in some regulations ? Do I not have enough capital to get 50% ? Is there an option to activate I am not aware of ?
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