Small Margin Question

Maverick74 · Feb 27, 2011

Quote from Bolimomo:

I don't know about IB. But many brokers have automatic swap set up for margin accounts. This means if you don't use your money to buy stocks and hold overnight, your money will be in a money market account earning interest for you. (Though not much these days). If you use your money to buy stocks, it swaps out enough of it to pay for the purchase.

e.g. You have $50k in your account. If you haven't purchased any stocks, your $50k will earn you some interest in the money market account.

If you buy $30k worth of stock1, the broker will automatically swap the $30k out of your money market account. You don't pay magin interest because you did not borrow any money to buy stock1. But you only have $20k left to earn you some money market interest.

Let's say you further use another $30k to BUY stock2. Then you are borrowing $10k from the broker. You don't earn any money market interest. And you will be paying margin interest (at a much higher rate) on the $10k borrowed. You don't pay margin interest on all $60k eventhough you have a 60k position.

This is how I understand it from my past tradings.

What I am not sure is when you use money to short stocks. Because shorting is done in margin accounts. If you have $50k and shorted and held $30k of stock1, will you be paying margin interest on all $30k. You could very well be.

You need to re-read your brokerage agreement. It makes it very clear in your contract. BTW, one of the reasons why every trade is marginable is it gives the broker the right to lend out your stock to someone else. If you paid cash for your stock they would not be able to lend it out.

Yes, if your cash is sitting idly in your account it will earn interest. If you have 50k in your account and you buy 30k in stock, you will pay margin interest on 15k and you will earn interest on the remaining 35k in your account.

luisHK · Feb 28, 2011

Please find below the reply from Etrade, it makes sense as for the last two months my cash balance has been positive on this account and no interests have been charged, whereas -ridiculously low- interests have been credited to my account for the positive balance:

" Thank you for your message regarding your E*TRADE Brokerage account ending in **** and the corresponding margin interest that said account is being assessed.

I understand your concern regarding this matter and in reference to your inquiry, any available cash in our customerÃâs accounts is always used before margin buying power in a margin account. For example, if you hold $2000 in account and want to buy $1500 worth of stock you will not be trading on margin. However if you hold $2000 in account and bought $3000 you would borrow $1000 on margin and would be trading on margin. Margin interest is only charged when money is borrowed from the brokerage firm for the purpose of margin trading. For more information on margin trading, please refer to the Help Center topics at the following URL:

https://us.etrade.com/e/t/estation/help?id=1302000000

Though we donÃât have any control over what forums advise customers, here at E*TRADE, margin interest rates are listed as annual figures that are added up (internally) daily and charged monthly. For example a rate of 8.99% annual interest on $6000, would be (0.0899 * 6000) / 360 = $1.48 daily or $44.33 monthly ($1.48 * 30).

To view current margin rates at any time, please refer to the Margin Rate section at the following URL:

http://www.etrade.com/fees

Additionally, the margin buying power that is reflected online in the Balance screen reflects your buying power when a stock has a 50% initial requirement and 30% maintenance requirement, which is usually the case. If a stock has more than a 50% requirement, the buying power for that stock will be lower than the listed margin buying power. To view the margin maintenance requirements for any stock please visit the following URL:

https://us.etrade.com/e/t/estation/help?id=1302010000

I hope this was able to address your questions fully. Please call or email me at 1-800-ETRADE-1 (1-800-387-2331 or at +1-678-624-6210 if your will be calling from outside US) should you have further questions and concerns. I look forward in assisting you reach your investment goals. "

Free Thinker · Feb 28, 2011

Quote from Bolimomo:

I don't know about IB. But many brokers have automatic swap set up for margin accounts. This means if you don't use your money to buy stocks and hold overnight, your money will be in a money market account earning interest for you. (Though not much these days). If you use your money to buy stocks, it swaps out enough of it to pay for the purchase.

e.g. You have $50k in your account. If you haven't purchased any stocks, your $50k will earn you some interest in the money market account.

If you buy $30k worth of stock1, the broker will automatically swap the $30k out of your money market account. You don't pay magin interest because you did not borrow any money to buy stock1. But you only have $20k left to earn you some money market interest.

Let's say you further use another $30k to BUY stock2. Then you are borrowing $10k from the broker. You don't earn any money market interest. And you will be paying margin interest (at a much higher rate) on the $10k borrowed. You don't pay margin interest on all $60k eventhough you have a 60k position.

This is how I understand it from my past tradings.

What I am not sure is when you use money to short stocks. Because shorting is done in margin accounts. If you have $50k and shorted and held $30k of stock1, will you be paying margin interest on all $30k. You could very well be.

ib hasnt paid interest for years.

Free Thinker · Feb 28, 2011

Quote from Maverick74:

That is 100% false. Brokers want you to think that. Margin interest is where brokers make most of their money, not on commissions. They would be out of business if they did not get that interest. It makes no difference if you have enough cash in your account.

what? you dont pay margin interest if you have enough cash in a margin account.

Bolimomo · Feb 28, 2011

Quote from Free Thinker:

ib hasnt paid interest for years.

Perhaps IB is in the business of ripping off investors?

I have been day-trading only. My capital had been earning some interests in the money market account for many years until 2009 when Ben kept lowering interest rate to practically zero.

Bolimomo · Feb 28, 2011

Quote from luisHK:

.....
For example, if you hold $2000 in account and want to buy $1500 worth of stock you will not be trading on margin. However if you hold $2000 in account and bought $3000 you would borrow $1000 on margin and would be trading on margin. Margin interest is only charged when money is borrowed from the brokerage firm for the purpose of margin trading.
.....

This is how I understand as well. (You only pay margin interest on the actual amount borrowed.) But perhaps different brokerage firms have different practice.

Maverick74 · Feb 28, 2011

Quote from Bolimomo:

This is how I understand as well. (You only pay margin interest on the actual amount borrowed.) But perhaps different brokerage firms have different practice.

Yeah one of the problems that comes up is the trade settlement t plus 3. Say you have 50k in your account and buy 50k of stock and "technically" don't use margin. Let's say a week later you sell that stock and buy another 50k worth of stock. That sale takes 3 days to settle so their is no margin release and you will need to borrow 25k from the broker to buy the 2nd stock and therefore pay margin interest even though you DO have enough funds in your account.

I still say to read your brokerage agreement over very carefully. The trade settlement is going to hit anyone that is even a semi-active trader in securities. Options settle t+1

pbj · Feb 28, 2011

Quote from Maverick74:

You need to re-read your brokerage agreement. It makes it very clear in your contract. BTW, one of the reasons why every trade is marginable is it gives the broker the right to lend out your stock to someone else. If you paid cash for your stock they would not be able to lend it out.

Yes, if your cash is sitting idly in your account it will earn interest. If you have 50k in your account and you buy 30k in stock, you will pay margin interest on 15k and you will earn interest on the remaining 35k in your account.

Wrong. You don't pay margin interest if you buy less stock than the cash you have in your account. You are confusing Reg T margin with margin interest.

Quote from Maverick74:

Yeah one of the problems that comes up is the trade settlement t plus 3. Say you have 50k in your account and buy 50k of stock and "technically" don't use margin. Let's say a week later you sell that stock and buy another 50k worth of stock. That sale takes 3 days to settle so their is no margin release and you will need to borrow 25k from the broker to buy the 2nd stock and therefore pay margin interest even though you DO have enough funds in your account.

I still say to read your brokerage agreement over very carefully. The trade settlement is going to hit anyone that is even a semi-active trader in securities. Options settle t+1

Wrong. If you sell 50k worth of stock A and buy 50k worth of stock B you won't pay margin interest since both trades settle in 3 days.

Maverick74 · Feb 28, 2011

Quote from pbj:

Wrong. You don't pay margin interest if you buy less stock than the cash you have in your account. You are confusing Reg T margin with margin interest.

Wrong. If you sell 50k worth of stock A and buy 50k worth of stock B you won't pay margin interest since both trades settle in 3 days.

I didn't say same day. The problem occurs when one is active, not passive. Relax.

luisHK · Mar 1, 2011

below is IB's reply :

"Kindly note that if you have sufficient cash in your account to cover the value of your trade, you will not be charged margin interest.

Sincerely,
IB Customer Service "