Trading on margin acceptable risk?

Barry_Bear

Deleted_User said:

Barry_Bear said:

Deleted_User said:

Barry_Bear said:

Using the same criteria if margin borrowing is limited to 50% - 40% of the initial equity stake, then the investments would have to fall 67% - 73% before a margin call is initiated. If the investment is a global index fund (iShares, Vanguard so widely trades and liquid), then the risk of a forced margin call sale would appear quite small. Unlike individual stocks, a broad global market fund is less risky and volatile. Obviously this is not saying global stocks could never fall 67 - 73% (1929 and 2000) but in both cases over weeks or months, never as a flash crash and without time to add cash to the account to maintain margin.

Has anyone here used margin conservatively in this way, any views on this level of risk?

If you would be holding cash that could be used to meet margin calls, why use margin in the first place?

I think you will find that IB have the right to change their margin requirements in response to market conditions, so you cannot rely on their current requirements remaining as they are through a massive crash.

You also can't rely on the timing of future massive crashes ressembling earlier massive crashes.

If the aim is simply to juice your returns by buying a slightly larger holding in global equities than you have the cash to buy, I don't think it's worth it.

Some (relatively rich) people might use margin as a temporary way to raise capital for a specific purpose, e.g buying a hosue before selling the previous one. Arguably that makes more sense, though it still seems like unnecessary risk-taking to me.

No it wouldn't be cash - the collateral is all the assets held in the account, which is essentially global equity index trackers. That's where the leverage comes from, so instead of holding, say £100k in equities, you borrow say, £20k on margin and have £120k invested. 

You misunderstand. My comment about cash was related to your comment about "time to add cash to the account to maintain margin". Where does that cash come from? If you hold £20k cash elsewhere, you don't need to use leverage in the first place. If you don't, you may not have the cash when there's a margin call.

I see. But you don't need to find the full £20K (or however much margin you've borrowed) to meet a margin call, you only need to have enough cash to cover the shortfall in the 25% maintenance margin. You'd only need find the full £20k in theory if the whole portfolio went to zero.