We mentioned margin and a previous episode and only touched on it. A lot of you wrote in with questions so we’re doing a whole show to explain what it is.
Simply put, margin is borrowing against your investments without selling your investments.
You can pull money out of your brokerage account on margin by setting a toggle on the account. You’ll pay interest and if you don’t pay back the loan, the brokerage firm takes your investment. It’s like borrowing money against your house. If you don’t repay it, the bank takes the house.
There isn’t a monthly payment, the interest gets added to the total margin you have out. The trick is to grow your investments faster than the rate of the interest. Playing with margin can be really good or really bad.
Margin is the reason people like Warren Buffett gets huge returns and the rest of us don’t.
You can use margin to do whatever you want, go to Vegas, buy a house, or invest in more stocks. We are doing this episode for informational purposes. Margin is a risky thing and not something novices should be fooling with.
So why not use your low risk investment to margin? You can expect about 7% returns, the interest on margin would be so close to or above that, it wouldn’t be worth it.
A margin call happens when the value of your account falls to value calculated by the broker’s formula. You would then be required to either deposit more money into the account or sell off some assets.
It's one thing to lose money. With margin you could lose more than your money.Tweet This
Again, LMM is not recommending this strategy. Just putting it out there for everyone to understand.
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