Margin Trading???
Q: I have bought and sold stocks, but now I would like to get into buying them on margin. I have only the foggiest notion of what it is. Would someone please post some information about margin trading, and its pros and cons?
A:
Assuming no margin interest, margin simply magnifies your gains and
losses. Of course, you DO have to pay interest. Imagine a bell curve
which represents probability of returns of your investments. Using
margin, the numbers on the X axis gets multiplied by a factor
dependent on ratio margin equity used. Then the whole curve gets
shift
someone please correct me!!
You get up to a max of 100% of your equity to loan thus increasing your
buying potential by 100%. For example, if you have $100 in your cash
account then you can borrow up to an additional $100, so with this loan, your
maximum buying potential is now $200. A margin account is an agreement
just like your cash account agreement between you and your broker. So
if more often than not, you trade with profit, then trading on margin has
the effect of boosting your yield.
Margin Cons: Only one - If you lose, you lose big time.
Moral of trading on Margin: Review your trading history and then take
the plunge accordingly. I personally trade on margin all the time.
This is a repeat of a response to a Margin posting on HWP. In it, I stated
that I also have been Margining stocks. As rates have risen to 7.5% for
margin money, sometimes more, It has obviously become more expensive to
Marginalize, hence, risk/reward has increased. However, the tax code has changed
to make it even more expensive to ,arginalize. In the old days (two years
ago?) It was possible to deduct your margin charges against your
investment income,i.e. capital gains, as well as dividends, and interest
income. Now however, one CANNOT use capital gains. You can only use
interest income and dividends. I believe this is very UNFAIR!!!!!! Margin Interest
is definitely a cost of doing business. In any other business, you are
allowed to deduct the interest expense as long as you show a profit and
sometimes, even if you don't. The question that is dying to be asked here
is: How can trading stocks be considered a business, and subject to the
same tax laws? I have been monitoring this situation for a year now, and
all I have been able to come up with is that the IRS still considers this
a VERY grey area. No guidelines have been established. Being a very
active trader, and as trading stocks are 100% of my income can, I file a
SCHEDULE C, profit and loss, and deduct the margin interest I incur in
the course of a year of trading stocks? As I said I know of no
guidelines\criteria for qualifying as a professional trader..i.e. of
trades, dollar volume, both? Anyone know?