At least at the major brokerages (I see there is an outfit that has significantly lower rates). The rates are significantly above the rates for 30 year fixed rate mortgages at this time, and I would expect that the rates should be lower. Consider
[ul]
[li]Margin rates are effectively short term/adjustable rates, which the brokerage can adjust at any time. These rates are lower than long term fixed interest rates.[/li][li]The brokerage is holding onto the collateral and does not need to go through a drawn out legal process to get hold of it.[/li][li]The collateral is extremely liquid[/li][li]The ratio of loan to collateral is generally lower for margin loans.[/li][/ul]
The only offsetting factor I can think of is that stocks can change value extremely quickly, and if a company suddenly announces out of the blue that they are going bankrupt, the stock may plummet below the value of the loan before the brokerage can sell it. But I would think that’s extremely unlikely, what with today’s computerized trading programs, and shouldn’t offset all the above factors.
In fact, that’s what actually happened during the crashes of 1929, 1987 and a few other times. Not so much that companies suddenly went bankrupt, but there were rushes of panic selling that collapsed stock values.
Besides, a broker is not a bank. They are in the business of arranging transactions, not lending money. Your real estate agent doesn’t offer mortgages.
I can see this in 29 when the margin requirements were looser and stock trading and communication were slower, but do you have a cite for any brokerages losing money in 87 (or any other recent time)?
I don’t understand this. If they are in the business of lending money then they are effectively a bank and at any rate their lending should make sense in the context of other loans. If a real estate agent started offering mortgages I would expect them to offer rates comparable to other lenders.
(Finance professional here, I was key in the creation of the margin limit policy for a major product on a major clearinghouse, so I know what I’m talking about).
You answered your own question correctly. It takes only one black swan to drive you into bankruptcy. Plenty of stocks do drop precipitously overnight when markets are closed – for instance, back in 2008, Bear Stearns closed around $30 on friday but then opened at $2 on Monday. That was an extreme case, but even in normal circumstances it’s quite common for stocks to drop 10-20% within literally seconds – check out NetFlix or Hewlitt Packard after their earnings calls last quarter. Brokers need high margin rates to protect themselves from losses against that.
BTW – most retail brokers won’t sell your stock if you drop below your margin limit, at least not until they’ve been able to contact you. Legally they could liquidate you right away, but they usually give you a pretty big grace period. Otherwise, imagine the situation where the stock is at $40.01 and your margin limit is at $40. The stock drops to $39.99 which forces the broker to immediately sell, but then only a minute later the prices raises back to $40.02. You’re within your margin limit again (and with a profit too!), but too late, they already liquidated you. You’re going to be super pissed off when you find out, so the broker usually won’t liquidate you right away.
Technical details aside, the spread between guaranteed mortgages and non-guaranteed ones is not nearly great enough for this to be the answer.
Brokers wouldn’t have losses in such instances. The margin requirements typically require the investor to have 50% equity or at least 30% (it varies by a lot of factors including stock volatility and price et al).
Having received a margin call or two in the past, I’m well aware of this. But again, the broker typically has a lot of room to work with. If you’ve gotten a margin call because your equity dropped below 50%, the broker can afford to be patient because they have a lot of cushion before they actually start losing money. I imagine it would be very different if you were close to zero equity, and I’m guessing these are the circumstances in which the brokers would exercise their right to liquidate.
TD Ameritrade is a “major brokerage” and their margin rates start at 1.5% I think that’s lower than any mortgage rate you can find - Brokerage Fees | TD Ameritrade
So the answer to your question is that they are charging what they can get away with.
You’re misreading that table. The 1.5% you are reading is that a margin debit balance above $999,999 will be 1.5% below their base rate, which is 7.75%
Thanks. I don’t use my margin acct very often - just when I’m adding to one position and haven’t been able to unwind another to my satisfaction.
I still suspect that they do this though because it’s what the market will bear. People who actually NEED margin are more like gamblers than investors. So the people who use it for a few days don’t really care if the rate isn’t competitive and the people who are maxed out are speculating so they don’t care either. That plus the fact that in the latter case it’s probably more of an addiction anyway, so if if they care, they won’t do anything about it like leave for another firm.
But again, the broker typically has a lot of room to work with. If you’ve gotten a margin call because your equity dropped below 50%, the broker can afford to be patient because they have a lot of cushion before they actually start losing money. I imagine it would be very different if you were close to zero equity, and I’m guessing these are the circumstances in which the brokers would exercise their right to liquidate.