From: ask@cbnews.cb.att.com (Arthur S. Kamlet)
Subject: Re: Loans from Margin Stock accounts?
Organization: AT&T Bell Laboratories,  Columbus, Ohio
Distribution: usa
Date: Wed, 12 Aug 1992 21:28:16 GMT

In article <1992Aug11.174606.10284@TorreyPinesCA.ncr.com> cs6@TorreyPinesCA.ncr.com (Eric Sit 3611) writes:
>In article <federkin.713454991@guppie19> federkin@rtsg.mot.com (John Federkins) writes:
>>I recently received in the mail some info about trading stocks
>>on margin.  This pamphlet implied that it was possible to take
>>personal loans in the same manner as you purchase stocks on
>>margin by using your stocks as collateral.
>>It further stated that the interest rate fluctuates but is
>>generally lower than the prime rate AND is tax deductable!
>>

Ah, another set of friendly people whose whole mission in life is
to make you rich.

>>Is this too good to be true?  Has anybody done this?  What

Why would you think the chance to pay someone interest at little
risk to them and reasonable risk to yourself is too good to be true?

 Hey, John, How would you like to buy some stock from me?  I'll
 charge you interest, but you can deduct it.  And I'll buy you twice
 as much as I'll buy for someone else down the block.  Isn't that
 just too good to be true, huh?  There are risks, but that's all
 spelled out in the fine print, and we wouldn't want to bother with
 fine print, huh?

 Oh, about charging you an interest rate below prime, I use my own
 special formula to prove it's really below prime, but let's not
 get bogged down in mathematics, huh?  OK?

 Did I happen to mention I might lend out some of your stock to
 other clients from time to time?  Well, don't worry about that.
  (Actually, that's not a worry with a reputable company - only
   with out and out crooks.)

I hope we learn to develop a certain sensitivity to all these folks
who only want to make money for us.

>>are the risks and/or limitations?  Can you trade stocks on
>>margin from an IRA?  And how is the loan paid back?

I don't think any IRA manager will permit you to buy on margin,
since a margin call could require you to place more cash into your
IRA than the IRS permits.  And it's risky.

>This has been my experience with Charles Schwab margin account:
>
>With $1000 in the account, you can buy $2000 worth of stock.  
>With $1000 worth of stock, you can write checks (in effect, taking
>out a loan) for up to $500.  In other words, you can borrow up to
>50% of the value of the securities.  The interest rate is 1 to 1&1/2%
>above the broker call loan rate.  The broker call loan rate is
>generally 1/2% below prime.
>
>The risk is, if the value of your securities drops sharply, 
>they would demand that you deposit enough money to maintain the
>loan to securities value ratio.  Otherwise, they can sell your 
>securities and hence forcing to take a bigh loss.

Does your broker even pay you interest on the cash you deposit to
cover the margin?  If not, then not only do you get to pay interest
to buy the securities, but you get to deposit cash with the broker
at no interest.

There are some minor other factors; e.g.,  you cannot ask for the
certificates of stocks held on margin.

>I don't understand why the interest is tax deductable.

The IRS allows you to deduct investment interest to the extent that
you had net investment income, with exceptions. You cannot borrow to
purchase tax-free securities, for example.  Of course, if you had no
net investment income, too bad.
-- 
Art Kamlet  a_s_kamlet@att.com  AT&T Bell Laboratories, Columbus