You know I don’t think you should be buying stocks on margin, though of course a “margin loan,” being cheap and, generally, deductible, is a heck of a lot better than a credit-card loan. Your after-tax cost of a margin loan, might be 5% versus 12% or 18% or 22% on the credit card.
The problem is that it’s too easy. With no one hounding you to repay it, or even “monthly minimum” payments required . . . you might easily let it slide. And then the market drops and, through the power of leverage, it hits you doubly hard.
So I advise people to avoid buying stocks on margin, and urge them to pay off quickly the occasional margin loans they might take as a convenience. (E.g., your year-end bonus comes in January, but your Christmas shopping can’t wait.)
Many people ignore my advice and carry fairly sizable margin balances. I certainly do from time to time. (Hey: if I followed all my own advice, I’d have nothing to write about. The wild risks I take are the selfless price I pay to amuse you.)
Which brings me to the point. I called my famous “full-service” broker and asked what interest rate they were charging these days. Then I called my deep discounter.
Guess what. It’s not just commissions where a deep-discount broker saves you money.
On anything under $10,000, Mr. Famous You’ve-Seen-All-Their-Ads Full-Service Broker currently charges 10-1/4%, which scales down to 10% up to $25,000, but only really gets good, at 8-1/4%, if your balance is over $100,000.
At my deep discounter, balances under $10,000 are charged 9-1/4% these days — and reach the magic 8-1/4% at $50,000.
(Note that margin interest rates can bounce around without notice, so to make a valid comparison, you need to call each broker the same day.)
Say you were almost as foolish as I am and ran a perpetual $20,000 balance. At Mr. Famous You’ve-Seen-All-Their-Ads Full-Service Broker, that would cost you $2,000 in interest a year. At my Deep Discounter: $1,750.
Assuming you can deduct the interest, the $250-a-year difference is less great. Still, one needs a good reason to borrow at 10% when an 8-3/4% loan is available around the corner.
You may have that reason (or your balances may routinely exceed $100,000, so you get the same rock-bottom rate you’d get from a deep discounter). But it’s one more factor to consider in your choice of brokers.
Now tell me this: the market is higher than it’s been at any time since a superheated gaseous cloud cooled into what we now call Planet Earth (not that I really buy this explanation), and you’re buying stocks on margin?
Tomorrow: My Yahoo vs Your Pointcast
Quote of the Day
It was only 80 years from the time Darwin published ON THE ORIGIN OF SPECIES until we detonated the first nuclear bomb. In the lifetime of one person, we went from figuring out where we came from to figuring out how to get rid of ourselves.~Paleontologist Jack Horner
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