Trading on margin is safe. As safe as trading in the stock market ever is. You have risk of course. Risk of losing all that you have borrowed plus any interest or fee incurred for using margin. Investors hedge the risk of trading in the open market in a lot ways. Options, portfolio diversification, position sizing, researching fundamentals, and watching technical signals are all ways for traders to reduce risk and improve chance of profit. None of this changes when trading on margin.
I do not want to undercut the risk and responsibility that should go into investing with borrowed funds. The term “trading on margin” definitely held a stigma for me when I first learned of it. I wasn’t going to touch it with a thirty-nine-and-a-half foot pole. The aversion started to thaw as I got to know the market and read up on how other traders used it. Gambler Gil Gullible isn’t rolling up to the table and throwing it all down on Red 32. At least he shouldn’t be. Margin investing is a tool. A resource investors can use surgically and strategically.
All right wise guy. Are you ready to put someone else’s money where your mouth is? Yes. Yes I am. Challenge accepted. Please follow along as I chronicle my efforts at trading, or investing if you will, on margin.
Robinhood Gold and Margin Investing
The broker I use, Robinhood, offers commission free trading as a matter of principle. They also offer a premium package, branded Robinhood Gold, at a cost of $5 a month. Gold gives you access to Morningstar research reports, Level II market data, and of course, margin. Your first $1,000 of margin is included with your monthly fee. Any margin used above $1,000 is charged 5% yearly interest. So $0.14 a day per $1,000 borrowed, if I’m doing my math right.
Several months back, I signed up for Gold as I really wanted access to the research reports and Level II market data. I have since found I use the research reports, but my Dividend Builder approach makes Level II irrelevant. The $1,000 in margin that is included? Well I put it right to work. I bought 68 shares of New Residential Investment Corp. (NRZ) at $14.70. NRZ pays a quarterly dividend of $0.50. With my 68 shares this totals out to $34 a quarter in dividends minus $15 a quarter in Gold fees. I cash out with $19 in profit each quarter plus Robinhood premium features being paid for.
Of course there is risk here. It is the stock market after all. However, I have followed NRZ for a long time, understand its fundamentals, and bought at a decent entry point. The other factor is that the only thing I am risking, beyond the normal risk of playing the stock market, is the $5 a month I would pay anyway to access Morningstar research. I believe I am using margin strategically. It is providing me with quarterly income and paying for Robinhood Gold. My risk is well managed, and my margin intimidation factor is shrinking.
Jumping into the Deep End
Okay fine, I am bowling with bumpers, in the kiddie pool, and riding with training wheels with the $5.00 fee and $1,000 to play with. Am I ready for the high dive? Not to worry. I will not take out $20,000 in margin or anything close to it. Starting with another $1,000 seems about right for a newbie like me. A manageable amount that I can easily track and report back on my blunders or brilliance. I aim to be a little more active with these funds instead of plunking them down in a high interest REIT or MLP. High cap, dividend paying, S&P 500 type companies are what I’m after.
I’d love it if you followed along with me as I try my hand at trading on margin. Watch for a series of posts with candid and honest reports on my efforts. As always, thanks for reading.