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Transcript
- 00:00
Finance Allah shmoop what is a margin account I think
- 00:08
the bank of you you have one hundred grand in
- 00:11
stocks saved in a margin account set up at your
- 00:14
kindly loving Morgan Stanley or Schwab brokerage Lots of lawn
- 00:18
mowing and rich Uncle dying went into getting that hundred
Full Transcript
- 00:21
grand Bessie Mae dies You need Bessie Mae two point
- 00:25
Oh the kind with round wheels this time Yeah she'll
- 00:28
cost twenty five grand You don't want to pay the
- 00:30
fifteen percent interest that the auto dealer offers you generously
- 00:34
loaning you the money And if you sell twenty five
- 00:37
grand worth a stock well you'll pay almost ten thousand
- 00:39
dollars in taxes so you'd have to sell something closer
- 00:42
Duff forty grand to net the twenty five grand after
- 00:45
tax And wow that's expensive for Bessie Mae Two point
- 00:49
Oh with the round wheels and air conditioning and windows
- 00:53
that actually work So you really don't wanna have to
- 00:55
sell stock The vastly cheaper solution is to borrow money
- 00:59
from yourself All right Well how do you perform this
- 01:02
magic Well your brokerage account is set up as a
- 01:06
margin account That is when you set it up You
- 01:08
checked and signed all the boxes that claimed you knew
- 01:11
what you were doing were of sound mind when you
- 01:14
signed and you realize that there's a fifty percent margin
- 01:17
limit on your account which is standard practice these days
- 01:19
So what does all that mean Well it means that
- 01:21
on your hundred grand of stocks in your brokerage account
- 01:23
you can borrow twenty five thousand dollars like tomorrow by
- 01:26
writing a check against it too dishonest Dean's discount dealership
- 01:31
and pay interest to Morgan Stanley or Schwab or whoever
- 01:34
has your brokerage account But you'll only pay about one
- 01:36
hundred basis points over prime rates or in today's world
- 01:39
three four percent if something like that nothing like that
- 01:42
fifteen ish percent egregious amount that the auto dealer would
- 01:46
want And this makes sense right when you're borrowing from
- 01:48
yourself If you ever don't pay yourself back while going
- 01:52
to be really easy to track down the deadbeat right
- 01:54
Morgan and Schwab happy to pledge or Chi pa Tha
- 01:57
Kate your stock to a bank and provide you whatever
- 02:00
cash liquidity you need by Bessie Tuo Morgan and Schwab
- 02:03
will pay maybe two percent or less on the money
- 02:06
They let you borrow for three percent or more so
- 02:09
they make a one ish percent spread for doing almost
- 02:12
nothing Nice work if you can get it And that
- 02:14
fifty percent margin limit thing Well what does it mean
- 02:16
Well let's say you've borrowed that twenty five thousand dollars
- 02:19
and weren't disciplined to pay it off And it just
- 02:22
sat there And then we had a really bad bear
- 02:24
market Like a mortgage crisis market that went down by
- 02:28
half or the individual stocks he loaned in there simply
- 02:30
went down by half And all of a sudden one
- 02:32
day you wake up and you have fifty thousand dollars
- 02:35
in change in the value of stocks in your account
- 02:39
Oh this is a problem Why Because if you don't
- 02:42
have atleast double in value in your account that money
- 02:45
you've borrowed the brokerage has the right to just sell
- 02:48
willy nilly Whatever assets you have to be certain that
- 02:51
you in fact keep it least double coverage right Why
- 02:54
Well they're letting you borrow money or at least borrow
- 02:56
liquidity at a very low price So they understandably expect
- 03:01
very low risk And if the market then goes down
- 03:03
another ten percent and your value is down to forty
- 03:06
five grand and you still have twenty five thousand dollars
- 03:09
in margin or borrow their well Then the brokerage can
- 03:12
and will immediately pick whatever stocks they want to sell
- 03:15
an anger behalf They will sell five grand worth of
- 03:17
stock just to get you to that magic half zone
- 03:20
So think about it There's a big big problem Why
- 03:22
they sell five thousand dollars worth of stocks to pay
- 03:25
down your twenty five thousand dollars of borrowing to then
- 03:27
be just twenty thousand Well in a margin account you
- 03:30
have forty grand now in value But those were stocks
- 03:33
that were gifted to you or maybe stocks you owned
- 03:36
a long time So now not only has the brokerage
- 03:39
soul chairs at a low price but you will owe
- 03:41
taxes on the gains from that five grand of sales
- 03:45
so you'll have to sell more shares down the line
- 03:47
to pay the kindly loving people of the I R
- 03:49
s bottom line Margin accounts are great if you manage
- 03:53
them and if you don't well yeah they end up
- 03:55
managing you
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