Saw an ad for a margin interest rate below 1% from IBKR and am considering opening a margin account. The appealing thing about it is you can pyramid (when your stocks go up, you can borrow more and use the funds to buy more shares). In a rising market with this strategy you can make a lot more than 2x what you make without margin. For example:
Suppose you bought 10 shares of Tesla at 200, using $1000 of your own money and $1000 from the broker. The stock rises to $400, and you now have 10 shares of Tesla worth $4000 and owe $1000 to your broker. You can now borrow an additional $2000. Now you use that to buy 5 more shares of Tesla. Now you hold 15 shares of Tesla, worth $6000, and you owe your broker $3000.
Then Tesla doubles again to $800. Now you have 15 shares of Tesla worth $12,000 and owe your broker $3,000. This entitles you to borrow another $6000, which you again use to buy 7.5 more shares of Tesla. Now you have 22.5 shares of Tesla worth $18,000 and you owe your broker $9000.
Finally Tesla doubles to $1600. Now you have 22.5 shares of Tesla worth $36,000 and you owe your broker $9,000, leaving you with equity of $27,000, and you would have 27x your original capital. Notice how if you didn't use margin you would have 8x and if you used margin but didn't pyramid you would have 15x.
The scary thing about it is that if you use a max pyramid strategy, one -50% fall will wipe you out, even if you previously made absurd amounts of money, as long as you keep going with the pyramiding strategy.
So to continue the example, suppose you borrow an additional $18,000 and buy another 11.25 shares of Tesla at $1600. Now you have 33.75 shares worth $54,000 and owe your broker $27,000. Now suppose Tesla falls back to $800. You get a margin call and are completely wiped out! Whereas with no margin you would still have 4x your original capital, and with only one use of margin with no pyramiding you'd still have 7x your original capital.
So yeah, pyramiding is lucrative but super risky and if you keep repushing the leverage no amount of success will protect you from future risk.
Seems dumb to me because not very often are companies going to just sit there and double and double over and over. A lot of you guys got in at an extreme low and rode the rise to a lot of money, but now I am seeing some of those who rode that wave starting to lament some losses now.
A good gambler knows when to quit.
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Xbox Live User Name - Corrik Currently playing: Spider-Man (PS4), Quantum Break (X1)