Margin Accounts Rip Off Retail Investors

As an investor, every once in a while something surprises you and makes you feel like a complete idiot. Just yesterday, going through my accounts, I noticed an interest charge which seemed a bit high. At first I thought it must be quarterly, but its every month. It would seem that an asset-backed loan like margin should be fairly cheap, like a bit over fed funds, but it never occurred to me that it would be more expensive than many credit cards.

Even worse, this rate is not really tax deductible.

Basically, unless you are rich enough to own crazy expensive homes that charge you more than $13,850 in annual interest expenses, you are not itemizing your taxes and you won’t get a margin interest deduction.

Most people are in the bracket where 25% of additional income is taxed federally, and in a state like California there is another 10% tax for the state. Add in the flat payroll tax from social security/medicare/medicaid at 10% and the unemployment insurance at 6% and that leaves you with only 49% of your hard-earned income from actual work. Then theres the payroll tax your employer pays for you but you don’t see, sales taxes, etc – its infuriating. That’s beside the point though, most of that extra tax is only charged for actual labor not capital gains or interest, so that leaves you with a 35% tax rate on your short-term capital gains.

If you purchase anything on margin, then you have to make a gain of 14.25% x 1.35 = 19.25% just to pay the broker and the government and break even. That’s one heck of a hurdle rate.

Anyway, I’m going to get my margin back to zero quickly, and possibly cancel the margin account. I’ll set my credit cards to minimum payment for a while (they’re cheaper) and sell some things off.

I didn’t trade anything last week, its been choppy. I tried to sell more covered calls on mining shares but my price wasn’t hit.

Here’s where my portfolio allocations ended up.

  • HEDGES (7.0%)
    • TLT calls (5.5%)
    • AAPL puts (0.5%)
    • LEN puts (1.0%)
    • AG w/ cc (6.2%)
    • EQX w/ cc (5.0%)
    • MTA (5.1%)
    • SILV w/ cc (4.7%)
    • LGDTF (3.3%)
    • SLVRF (3.5%)
    • SAND w/ cc (2.6%)
    • MMNGF (2.7%)
    • MGMLF (1.8%)
    • SSVFF (2.1%)
    • BKRRF (1.5%)
    • RSNVF (1.5%)
    • DSVSF (1.5%)
    • HAMRF (1.1%)
  • URANIUM (26.5%)
    • CCJ w/ cc (3.8%)
  • DNN shares (3.3%)
    • DNN calls (1.8%)
    • UEC (3.3%)
    • UUUU (3.9%)
    • BQSSF (3.9%)
    • UROY (2.8%)
    • EU (1.7%)
    • LTBR w/ cc (1.8%)
  • BATTERY METALS (11.7%)
    • NOVRF (5.4%)
    • SBSW (4.5%)
    • EMX (3.1%)
    • PGEZF (1.9%)
  • CANNABIS (9.9%)
    • AYRWF (0.5%)
    • CCHWF (0.6%)
    • CRLBF (1.2%)
    • CURLF (1.3%)
    • GTBIF (2.4%)
    • TCNNF (1.3%)
    • TRSSF (1.2%)
    • VRNOF (1.6%)
  • OTHER TRADES (6.1%)
    • DOCN cloud computing, w/ cc (2.2%)
    • XRP crypto token (4.0%)
  • CASH (-6.9%)


About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
This entry was posted in Uncategorized. Bookmark the permalink.

1 Response to Margin Accounts Rip Off Retail Investors

  1. rv7a says:

    Check out Interactive Brokers (IBKR)… Their margin rates are much, much better.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s