Using margin loan at Interactive Brokers

Investing / Brokers
85

Well sorry but the whole purpose is to to withdraw cash by leveraging your equity and taking advantage of the low interest rates so what’s the point if your deposits are directly credited against the principal and you can’t roll the loan?

You would basically transfer your margin loan from a cash position to stocks, which would imply perpetual fees and interest charges until you sell some…

Assuming 50k margin cash loan and monthly dca funding/investing of 5k, this means the principal would be reduced by 5k every month over the course of 10 months. But to invest those 5k in stocks as intended, the system would then grant a further loan of that amount to buy said stocks. Meaning after 10 months you will have turned a zero net cash position into a 50k margin loan invested in the market that would run you 1.5% interest charges indefinitely until you sell.

86

ok, and sorry if I’m not following, but what would be the difference if instead of topping up the debt, you keep the 5k separate and buy stocks with that? the 50k debt you took at the beginning would still stay at 1.5%. Indefinitely.
I’m not sure I see the difference actually.

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87

actually if the point is the interest rate, margin loan interest rate is calculated daily. Is not fixed the day you take out the loan. Every day they look at the negative balance and negative interest is accrued daily by the interest rate of the day. MAybe this is the source of confusion.

88

You may want to have a look at one of the last posts from big ERN which analyses the possibility to fund early retirement with IB margin (though it just consider the option of constant withdrawal, might be interesting if he further develops the topic by analyzing other margin utilization strategies based on highs and lows in the stock market)

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89

Hi there,
I just switched from a Cash account to a Margin Account.
Currently the sitution is as follows:

  • RegT Margin: 50% of current Portfolio Value
  • Current Initial Margin & Current Maintenance: around 30% of current Portfolio Value

Do I understand correctly that both these Margins need to be fulfilled all the time (Totalling 80%)? Meaning I can borrow a maximum of 20% of the current Portfolio value, but as soon as the Market drops more than 20% IBKR automatically starts liquidating the positions?

What I would like to do - in case of a significant marked downturn - is to leverage the portfolio to buy more VT shares than usual. Idially I can take out the margin loan in CHF, then exchange to USD and buy VT. Is there a step by step guide somewhere?

Thank you in advance

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90

This is overnight. And the one that matters.

This is intraday. You can open positions worth more than half of your equity, but should close them at the end of the day.

Don’t borrow more than 25% of your stocks value, and as long as your stocks don’t halve, you are fine.

Each exchange costs 2 USD. Borrow USD or borrow CHF, but exchange largish amounts at once.

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91

And I would rather borrow USD, because US ETFs distribute dividends in USD and this will automatically decrease your loan.

92

For the tax declaration it is easier to borrow CHF (i.e. exchange CHF that you don’t have for USD) because you can directly deduct the interest paid in CHF, otherwise you are supposed to take into account the various exchange rates.
Also this way your loan is not impacted by big variations in exchange rates, which might be better since the currency of your usual income is probably CHF.

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93

Thank you both. Is there a step by step guide on how to actually do this in IBKR? I was not able to find any guidance.

94

Afaik you just exchange non-existing CHF to USD or whatever currency you need and you will end up with a negative cash position.

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95

I recommend that you test things in the paper trading mode first. You will not explicitly request a loan, the system simply allows you to buy what you want even if you don’t have the cash for it. Up to the margin limits.

As example, before trading your portfolio consists of:

  • 220 VT
  • 1’500 USD

VT now drops to 90 USD and you decide to buy 100 VT. Your portfolio will now look like this:

  • 320 VT
  • -7’500 USD

Your total portfolio value at this time is 21’300 USD, your margin is at 74%. Suppose VT now drops to 85 USD and you want to take this ‘once in a lifetime opportunity’ and buy another 100 VT. The portfolio is now:

  • 420 VT
  • -16’000 USD

The total portfolio value is now at 19’700 USD, your margin is at 55%. If VT drops further and crosses 76 USD (overnight and not a intraday spike) IB will start selling of your stocks.

I didn’t double check the math on this one, so until you’re comfortable in knowing what you are doing test it with IBs paper trading mode. Also this obviously ignores fees and the margin loan interest payments (currently at 1.5% pa), and your ability to inject new cash. But realize that the loan is fixed and your collateral variable in value, which is not a great thing in a volatile period.

96

Not wrong, but keep in mind that you now move the currency risk between loan & collateral. You can now not only violate the margin requirements because VT is dropping, but also due to currency fluctuations. Even if historically the CHF / USD pair seemed to be a one-way road and usually is in our favour in volatile times, short term fluctuations may still catch you out.

97

In my opinion this risk is lower because the currency of VT doesn’t really matter. If the USD were to drop, the price of VT should rise accordingly. But yes if the CHF appreciates too much globally you could be in trouble.

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98

Thanks. How did you calculate the 74% and 55%?

99

(Value of your assets - debt) / value of your assets

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101

I don’t want to sound rude, but the questions you are asking make you look like margin trading is not for you.
Before you start trading on margin you should really understand all the risks and keep in mind even the biggest geniuses failed when using margin (e.g. LTCM).

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102

In my opinion, the only way to use margin if you want to FIRE… is to not use it.

Only one caveat: keep a low emergency cash fund in your bank (say 10–15k), and if something really huge happens and you need cash overnight then you can use the margin at ibkr to get that cash fast at a low rate without having to keep a massive cash amount at your bank at all times.

But trading on margin? I wouldn’t do that, ever. You’ll be financially ruined when they call the margin.

103

Again, margin per se is not the absolute evil. All businesses rely to loans. Of course if one uses his/her available margin in full and maybe to buy speculative assets, this means calling for troubles…
One has to do its own DD but a certain dose of calculated risk is intrinsic if one wants to make $$$ (we are already doing this by investing in the stock market)

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104

To each their own. Leveraged position = leveraged losses which isn’t acceptable to me personally but you do you.

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105

Like you say it depends

I have a margin loan worth 10% of my stocks. I have a salary. In my opinion I am taking much lower risk than colleagues taking 1.5M mortgages to buy houses worth 2 or 2.5M.

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