Post by cwah on Jul 5, 2020 3:10:12 GMT
Hello,
Since I've had access to my Margin account on Interactive brokers, it's a pleasure being able to buy stock on Margin with interest rate as low as 1.5%. Gains are much higher, but losses are twice as painful.
I've been looking at risk buying on margin, and what are acceptable risks.
50% margin:
Meaning if I have 100k, I'd borrow 50k for a total of 150k to play with
If the portfolio drops by 33%, the reduced total would be 100k and any loss would start triggering margin call (ie. 50K is loan and 50K is my asset, so any further asset loss need to be covered)
If the portfolio drops by 66%. My account would be wiped out.
So, a 50% margin shouldn't be used most of the time as a 33% loss would already trigger margin call. Stop loss is mandatory to avoid tragedy.
30% margin:
50% drop triggers margin call
76% drop wipes out the portfolio
A 30% margin could be used under some circumstances where there is a high likelihood of success. Stop loss are necessary as well
20% margin:
66% drop triggers margin call
83% drop wipes out the portfolio
A 20% margin is still higher risk even though it seems low and needs stop loss. It can however be used more regularly as a 66% market drop is much less likely than the previous situations.
10% margin:
80% drop triggers margin call
91% drop wipes out the portfolio
10% margin seems relatively safe and can be used regularly. Probably doesn't need stop loss and it's unlikely to see an 80% drop although possible.
5% margin:
90% drop triggers margin call
95% drop wipes out the portfolio
I think this one is safe enough to be used regularly and long term.
So now that I've estimated the potential margin call, I can really see that 50% margin is actually super high risk and not to be used. But a 10-20% margin on regular basis could be used when situation allows. What do you think?
Since I've had access to my Margin account on Interactive brokers, it's a pleasure being able to buy stock on Margin with interest rate as low as 1.5%. Gains are much higher, but losses are twice as painful.
I've been looking at risk buying on margin, and what are acceptable risks.
50% margin:
Meaning if I have 100k, I'd borrow 50k for a total of 150k to play with
If the portfolio drops by 33%, the reduced total would be 100k and any loss would start triggering margin call (ie. 50K is loan and 50K is my asset, so any further asset loss need to be covered)
If the portfolio drops by 66%. My account would be wiped out.
So, a 50% margin shouldn't be used most of the time as a 33% loss would already trigger margin call. Stop loss is mandatory to avoid tragedy.
30% margin:
50% drop triggers margin call
76% drop wipes out the portfolio
A 30% margin could be used under some circumstances where there is a high likelihood of success. Stop loss are necessary as well
20% margin:
66% drop triggers margin call
83% drop wipes out the portfolio
A 20% margin is still higher risk even though it seems low and needs stop loss. It can however be used more regularly as a 66% market drop is much less likely than the previous situations.
10% margin:
80% drop triggers margin call
91% drop wipes out the portfolio
10% margin seems relatively safe and can be used regularly. Probably doesn't need stop loss and it's unlikely to see an 80% drop although possible.
5% margin:
90% drop triggers margin call
95% drop wipes out the portfolio
I think this one is safe enough to be used regularly and long term.
So now that I've estimated the potential margin call, I can really see that 50% margin is actually super high risk and not to be used. But a 10-20% margin on regular basis could be used when situation allows. What do you think?