From: rlcarr@animato.network23.com (Rich Carreiro)
Newsgroups: misc.invest
Subject: Re: Loans from Margin Stock accounts?
Distribution: usa
X-NewsSoftware: GRn 1.16e (7/4/92) by Mike Schwartz & Michael B. Smith
Date: 13 Aug 92 23:03:42 EDT
Organization: The Other Side of Life

In article <1992Aug12.212816.24239@cbnews.cb.att.com> ask@cbnews.cb.att.com (Arthur S. Kamlet) writes:
> 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?

Depends on your definition of "too good to be true."  You are being
overly negative.

*IF*
(1) you are margined relatively lightly, so that it would take a big
    drop to trigger a margin call, and
(2) you feel that the prime rate (and hence broker call) won't be going
    up anytime soon
(3) you feel confident that your brokerage won't go under anytime soon, as
    margined securities are commingled with the firm's assets, and so would
    be harder to sort out in the event of a bankruptcy.
THEN
    using a margin loan as a personal loan is a very good idea, and
    something you should consider.

>  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?

Brokers publish their rates.  Mine is 1% above the "broker call rate"
published in the WSJ, and is thus a well-defined rate.  Since the
broker call rate is usually below prime, if the addition to it the broker
is charging is small enough, you may well be paying below-prime rate.

>  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.)

Why worry about it?  Besides, the hypothecation and re-hypothecation
pledge is in the margin agreement, if you bother to read it.  This is
what allows short sales to exist, by the way.  And by paying back your
margin loan, you can request back your stock, forcing the broker to 
get it back from whomever it is lent.

> >>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.

Even simpler than that.  IRS rules prohibit IRAs from being used as
collateral on ANY kind of loan.  So this rules out trading on margin
in an IRA.

> 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.

Of course he doesn't!  The cash you pay him is a partial/total repayment
of the loan he has extended to you.  Why on earth should he pay you
interest when YOU owe HIM money and are simply paying down part or all of
your debt?

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

Of course not; the stock is collateral on the margin loan.  Again, this
is all in the margin agreement -- so one shouldn't claim surprise at 
finding out about it.

-- 
Rich Carreiro                                  Home: (401)841-8514
rlcarr@animato.network23.com
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