I need help understanding a margin account.?

Question

My question about a margin account is this: Do you have to pay it ALL back right away or do you make montly payments? Say I borrow 10000 from my broker, buy 1000 shares of a stock when do I have to pay back the broker? If the shares fall below 100 a share will I have to pay back more than the 10000 I originally borrowed?

Answer 1

They charge you like a credit card.  There is an APR and charge your account monthly the fees.  When you sell the stock they get their money first, which was the amount barrowed.  Hopefully you stuff went the way you wanted and you have a lot more money then when you started.

Further, I agree with "Nobody" don't do it yet.  We can tell you don't really understand it all that well.  I got burned pretty good a couple times.  The broker will sell off your stuff if it goes bad, then you get stuck with the tab.

Answer 2

you pay the 10,000 back when you sell the stock.

you get to keep all the profits if the stock goes up

if the value of the stock goes down at any time (sold or unsold,) to say, $900 you must pay the difference $100 to the brokerage so that their investment is covered by you.

you will get a "margin call" to notify you when you have to pay

if you dont pay they will sell 100 dollars worth of your stock to cover their loss

also be sure to check if they have any additional fees

Answer 3

My broker never asks for any payment. They are more than willing to let the debt ride and accumulate as long as you have enough available on your margin account.

They even still wash the dividends in to my money market without applying it to the debt. I have to transfer it back to lower the debt.

My strategy is to only buy on margin only high dividend stocks to pay off  or help counter the margin interest. Until recently stocks were too high priced. If the dividends are about half the margin interest and you can only margin at 50% then I maintain a postive cash flow.

But that is just me.

Good Luck.

Answer 4

I'll add one point - be careful taking a short position or options position using borrowed funds. A short position means that you're selling the shares now with the hope of buying them back at a time in the future when the share price drops. This opens you up to unlimited liability - if you short-sell a security that increases 10-fold in price, you take a 1000% loss on the position. This is opposed to a long position (buying a share and holding it), where the greatest loss you'll incur is if the share price drops to zero, a mere 100% loss. Actually, I'm not even sure if brokerages allow you to short a security using margin funds, considering the risk.

I can't add much else - the previous answers pretty well hit it. A margin account is a line of credit for the purpose of buying securities. Your broker has an interest in the securities so if you ever default on a maintenance payment (monthly payment or fail to bring your equity to the required margin) your broker can seize the assets in your account, namely the shares. Generally what happens is that they'll sell enough of the shares to cover the payment. You're still liable for the full amount you borrowed, so if you buy shares in a company that goes out of business, you're liable for 100% of what you borrowed (plus interest) but have no collateral to back it up.

As with any line of credit, read the fine print. You may have additional fees to pay or margins to maintain.

Answer 5

You will be charged interest on the amount that you borrowed for as long as it is outstanding.

You would never have to pay back MORE than you originally borrowed, except for the cost of interest.

The bigger risk is if, for example, you have $1,000 in cash.  You borrow $9,000 and combine that to buy $10,000 worth of a stock.  If the stock value declines, your underlying cash position may not be enough to meet margin requirements.  The brokerage would then REQUIRE you to post additional cash or sell your stock to meet that cash requirement.

Answer 6

NO

You can have your account in a debit balance as long as you want to carry it as long as you meet the margin requirements the broker set for this type of account.

The debit (the amount you owe) is paid off when you sell the security or remit money to the account.

Your required by Federal law to have a minimum equity in the account of 25% HOWEVER, the Brokerage firm will require you to maintain a higher equity (possibly 35%).  Once you equity falls to or below that amount you will be requested to deposit additional monies (or marginable stocks).

If your equty falls below 25% you will have 24 hours to remit additional monies (or marginable securities) , if you fail to to do this, securities in the account will be liquidated.

Based on your question, there is no way you should have a margin account.  If you don't understand the very basics of margin you should not use this type of an account.

Answer 7

Usually the brokerage firm is charging your account monthly, but they don't send you a bill it just increases your margin debt as they pay the interest out of your margin account.

If you deposit 5000 in cash in your account you can buy 10,000 worth of stock. 5k you put up and 5k you borrow, your stock worth 10k is the collateral that you will pay back the 5k. For you to borrow 10k you must have put in 10k, so your account has a value of 20k, you bought 1000 shares of a $20 stock. If the stock goes down to $10 a share it is now worth only 10k, and you will get a margin call, that is you have to send in more money right away, if you can not or do not then the brokerage firm will sell your shares and get back the money ( 10k ) you borrowed and you will still owe them the interest on the loan depending how long it took for all of this to happen. Lets say the stock goes to 30 per share and you sell it, your account gets 30k, you pay off the 10k you borrowed and any interest you owe for the amount of time you had the loan, leaving you under 20k and the ability to borrow again. So initially you can borrow up to 100% of the cash you have in the account, but if the value of the stock drips to 30% of your account value you will get a margin call to send in more money.

Is that clear?

If not email me and I'll try to make it clearer.