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BUT NOW WERE GETTING TO THE WAY THEY REALLY MAKE THE MONEY;AND YOU LOSE MONEY….

Many of you may not know what Margin is,and/or may not ever use it.You may have been warned against it.In fact an excellent case can be made for NOT using it.Any time you borrow money for an investment there is a risk.If the investment goes against you you still owe the money,but with a lower ability to pay since you have suffered a loss!.

However it is important to understand this even if you don’t plan on using it.This is because it will help you see where the broker makes money on your account,and because situations may arise when you didn’t plan on using margin but need to.Let mention some basics.

Margin simply means the broker lends you money using the cash or securities in the account as collateral.Since the broker holds the securities their not to worried about you not paying ..or are they?(more about that later).

Unless you are Bill Gates it is unlikely you will ever get a loan, for anything ,for less interest than the margin loan rate.So there fore it is handy for when you need to borrow but you don’t wish to liquidate positions in your account.As stated, many brokers link accounts to checks and credit cards.Of course you are borrowing your own money!,however at least in theory you investments go up in the mean time.

Now the margin loan rates are always listed on the fee page.They are usually quoted as a spread or addition to the “BROKER CALL RATE”..this is a benchmark much like “fed funds rate “or “prime rate” that is quoted in the financial papers.

Each broker charges different spreads or additions to this rate,depending on account balance,activity,and what he thinks he can get away with.

Do they vary?you bet,you should compare if you run margin balances.That said it is pretty easy to check on the fee list.In the next section we will show you how they really make the money

Ok stay with me.The subject of margin is very complicated and to fully cover it beyond the scope of this website,however we are going to focus in on how this can affect you in your daily trading activity.

First ,the percent the broker can loan against your securities is regulated much like interest rates,by the Feds.So it can vary.

If the Feds feel there is to much “irrational exuberance” for example, they can decrease the amount brokers can lend against your equities.They haven’t done so lately,but they did change some rules for certain types of loans on derivatives.Some said that the crash of 29 was caused by Margin rules that required only %10 equity in securities then.

When securities decline in price,the brokers issue the dreaded margin calls,which usually forces investors to sell feeding the decline,as selling begets selling.As of the date of this (2/16/07)Margin loans are at a high at brokerages.I will let you draw your own conclusions there.

In order to understand if you are getting a good deal you need to know what is allowed.Most brokers in my experience will tell you that margin rates are”standard”

BULL.

What is true is that the feds have a MINIMUM margin rate that brokers must use.

This is because the government is trying to maintain order in the financial market and regulate speculation.

What they don’t have is any rules on how much OVER the minimum the brokers can charge.

Let The Party BEGIN!!!.

Now you need to get a list of the Fed. minimum rates(I will provide a link).This will be you “best case” deal you are looking for.I will tell you right now you are unlikely to find many brokers who will charge the minimum,for this is where they make the money without you noticing.

In regard to Marginable stocks the minimum maintaince requirement is 25%.You need to put up 50% of the value of the stock to buy it,but only reserve 25% to keep it in the account.

The more they withhold for maintanence the more they can collect interest,and the less you have for other investments,and the more likely you will incur a margin call(FYI they charge fees for margin calls too sometimes).

Also, if they pay you interest in a sweep account for cash,now they don’t have to pay so much because your cash balance is less ;it is tied up in there extra margin policy!.

This is heaven for the broker. You lose they win.

Many brokers charge a 30% maintainence,but I caught one clown……….charging 50% maintainence!!.Outrageous.

The fall back excuse is usually that the broker is worried about the customer losing  money and  it’s for your own good.You believe that?.

But what type of securities can be bought on margin?.

Here again you will be told that this is  standard(sound of  buzzer).Many brokers  change the margin rules for certain types of securities.The fall back excuse is always safety,but it helps to make a big profit doing it too.

Many brokers will not extend margin for stocks under $5 share price,meaning 100% of price to buy and to hold.Some set this lower at 3$ or 4$.Some allow only 50% margin instead of 25%.

This is always explained as “low price stocks are more risky”.the policy is so prevalent that many companies like JDSU and NT recently had Reverse stock splits so that investors wold not have to fight this rule.

Of course the whole rest of the world has markets where share prices are mostly in the under 10$ range.So this theory(or excuse to charge more interest)is suspect at best.

If the stocks under $5 are more likely to be risky,obviously the broker is saying they could go to 0.Ahh so the maximum loss is $5,What is the maximum loss for google?

Makes you wonder why most brokers charge higher margin to short sell stocks under $5.Which is it?More likely to go up? more likely to go down?,or more likely more money in the brokers pocket?.

“Special” stocks.Many brokers maintain a list of stocks that they consider high risk(at there sole discretion)They then insist on higher maintainence equity to hold these.

These can change at the drop of a hat and cause you a margin call  if you already own them .Two stocks that I was aware of that made the list at one time were Taser and AIG.

So they get more money off you if you want to play with these stocks.Conversely if you want to short stocks,I have found that the most wanted stocks are on the “hard to borrow” list.what this means is the broker has to use what is know as a “prime broker” to get a hold of these and you must pay your broker extra to get these if you wish to short them.

If you plan on shorting stocks spend some time finding out the supply of stocks at your intended broker before you go there.

With the prevalence of hedge funds there is a big problem with availability.Last year GM was on the ‘hard to borrow list”.Hard to believe with all that stock outstanding