Saturday, June 27, 2009

One More on Margin

A good way to dig into the concepts behind "margin accounts" is to download the margin handbook at an online broker-dealer. After reading TD Ameritrade's Margin Handbook, I felt as if I could go on and on for hours about the topic . . . if I could get anyone to, you know, listen.

Or, you might just want to slog through annoying practice questions, like this:

If your investor sells 1,000 ABC short @37, makes the required Reg T deposit, and then sees that ABC is trading for $18, what is true of the equity in the account?
A. the equity is unchanged
B. the equity is below the minimum maintenance requirement
C. the equity has decreased by $19,000
D. the equity in the account is $37,500

EXPLANATION: whenever someone sells stock short, he wants the stock price to drop. Since ABC does drop, you know that A and B can't be right. The equity has certainly changed even if you aren't sure how. And, since the stock went the correct direction, the equity is improved not "below the minimum maintenance requirement." Do this type of work before you start calculating--knock things off your plate as soon as possible. Now, really, you could eliminate "C," since the equity has increased, and then to check your work do this . . . add the $37,000 the investor receives on the sale plus 1/2 that amount ($18,500), which is the cash he puts down. His Credit - $55,500. Just subtract the current market value of $18,000 from that, and you get the correct answer of $37,500. The opening credit on a short sale is "half again as much" as the short sale. Subtract the market value of the stock from that, and you've figured the "investor's" equity.

Thursday, June 25, 2009

Margin Update

Logged into my TD Ameritrade account this morning and found that Hospira (HSP) is still trading in the same range. My "SMA" is still about $2,000 and I'm still not going to tap that line of credit, let alone use my buying power to purchase up to $5,700 worth of stock. Good thing I took the $5,000 loan against SMA for educational purposes only, because this is a losing proposition as a so-called "investment." See, Hospira isn't paying any dividends, and even if they were, it's pretty unlikely that any stock's dividend yield is going to outweigh the margin interest that the "investor" is paying, even after-tax. As at the casino, the margin investor needs really fast movement on the stock, preferably in the correct direction. I'm lucky I have the $5,000 in checking because if HSP announces bankruptcy or that one of their I.V. systems accidentally killed 27 patients nationwide, the stock could drop to $2, or zero even. Probably not going to happen, but it's always a possibility when you're dealing with a stock. Investing in the stock market always involves market risk in general and non-systematic risk specific to the particular company. To then buy that stock on credit is to take an already dangerous animal and pump it up with steroids, which probably explains why I'm having so darned much fun with this. I'm a guy. I take stupid risks. What can I tell you?

Wednesday, June 17, 2009

Margin Question

Let's enjoy a challenging practice question on margin accounts:

A customer in a new margin account purchases 100 XYZ @38 and makes the required Reg T deposit. If XYZ rises to $52 a share, the equity in this long margin account will be
A. $3,300
B. $3,400
C. $3,200
D. $1,400

EXPLANATION: this is a very tough question. First, if you simply take 1/2 of $3,800, you will get the question wrong. But, if you're lucky enough to remember that the minimum maintenance is $2,000, you could easily mess up by writing $2,000 as the Debit Balance. Remember that if the customer deposits $2,000 on a $3,800 position, the Debit Balance is only $1,800. So, when the stock rises to $5,200, the equity is the difference of $3,400.

Margin Question

Not much to report on my adventures with margin loans. Hospira (HSP) is still about where it was, and unless it rises sharply, I'm going to have to dip into savings to pay back the loan I took from "SMA." Oh well. I'll keep you posted on that.

For now, let's do a question on margin accounts:

An investor purchased 1,000 shares of XYZ @50 in a new margin account, making the required Reg T deposit. If XYZ rises to $75 per share, the investor's buying power will be equal to:
A. $12,500
B. $25,000
C. $50,000
D. $75,000

EXPLANATION: the investor has a Debit Balance of $25,000 after putting down $25,000 cash money. When the stock value rises to $75,000, the equity rises to $50,000. Now--carefully--what is the Reg T requirement on $75,000? Only $37,500. So, there is $12,500 of excess equity or SMA. The customer can borrow $12,500; his buying power is twice that amount, or $25,000.


Thursday, June 11, 2009

Why I Do This

People often ask me why I choose to spend most of my waking hours thinking, speaking, and writing about exam material that most sane people wouldn't touch with a 10-foot pole. The answer is simple--the money. Seriously. Who'd a thunk that a guy could be a teacher and a writer and also be able to make a decent living. Not me, that's for sure. A few years ago, I was this close to resigning myself to the fate of a daily, per-diem Series 7 instructor for a big test prep company. Now here I am running a viable test prep business myself, having a ball thinking, speaking, and writing about exam material that most sane people wouldn't touch with a 10-foot pole. Or, if they did, they would probably focus on just one or two exams--covering the Series 6, 7, 63, 65, and 66 does seem overwhelming at times. But then I open up my inbox some days and get thank-you emails from glowing, proud, successful customers. Check out the two that I received this afternoon and you'll see that the reason I do this is about more than just the money:

Hey bob,

I'm delighted to inform you that I pass the 63. You material were key to my success. Let me know if you can use my referral. Now, I can keep my job with this difficult economy. Thank you for everything. Now, I want you to get me through the series 7 and 66 within the next 8 months if possible.


I just want to drop you a note and thank you for all that you have done for me. I sat for the Series 7 last Thursday and passed!I took the exam 3 years ago and really didn't know how to take the test.Everything in your book, cds, and quiz set make this very easy. I felt very comfortable, in fact I felt that you had me so prepared that when I finished I hit the button to see if I passed or failed and I did not even look up at the screen. I walked out and asked the proctor what my score was!!!!!!!!!!!!I have told numerous people around the country to look up your website.P.S. I will miss your Friday broadcasts!

Tuesday, June 2, 2009

What's a Hospira?

I've mentioned that the exit strategy for my little foray into margin loans is the inevitable rise of Hospira common stock. If Hospira rises to $55, I can sell my 90 shares, pay back the margin loan and continue to hold the other shares I currently hold in an IRA. But, what is this "Hospira" I keep referring to? It's a former unit of Abbott Labs, which is another stock I own (and love). Hospira was spun off from the parent comany, which is where I got my initial dose of the stock. Later, when I became the executor of my mother's estate, I purchased 270 shares, or 90 for me and each of my two sisters. Hospira is a very simple, straightforward company--basically, they make injectables and I.V. systems for use in hospitals, clinics, and in-home care. In the past five fiscal years, their sales/revenue came in at about $2.64 billion, $2.62 billion, $2.68 billion, $3.43 billion, and $3.63 billion. Their net income (profit) has been anywhere from $107 million to $321 million most recently. The stock is not trading expensively--like most stocks these days--at only 13 times earnings. It earns $2.61 per share but--like many companies--pays no dividends. How do you make money on a stock that pays no dividends? You wait for it to rise in value, at which point you can sell for a capital gain or, perhaps, the company eventually does start paying dividends, making it both a growth and an income investment. From a technical standpoint, the short interest is very low in the stock; only about 2.5% of the shares have been sold short. The 52-week high is about $42; the 52-week low is about $21. Lately, it's on an uptrend: +7% last 5 days, +8% last 30 days, +15% last 60 days. What does this all mean for my chances of Hospira rising to $55 or higher, allowing me to sell and pay back the $5,000 I borrowed from my margin account?
No idea. Luckily, the exam doesn't expect you to know something like that. The exam just wants you to have an idea what earnings and P/E ratios might be, which stocks are generally more volatile and which are generally more stable, that sort of thing. Being able to relate some of this exam material to the real world will give you a big edge when studying, so I encourage you to look up some of your favorite companies and look for testable points. Glance at the income statement, click on the "overview," and have yourself as much fun as I'm currently having at 4:55 AM on a cold, dreary morning in early June.