Tag Archive: Brokerage

Cash balance interest and margin account

Abstract: This post is about how to maximize your cash balance interest earnings while waiting for an opportunity to invest the money.

Nowadays, many investors use discount brokers to purchase their stocks and ETFs. Discount brokers are great because you pay a low commission per trade, usually in the region of $3 to $7. However, the interest paid on the cash balance you keep at the discount broker is usually not competitive with what you can get from online banks. The following is a survey of the cash balance interest rate of several discount brokers:

2006-10-10-cashbalanceinterest.png

Contrast this with the 5.25% you can get from GMAC Bank or 4.5% from Presidential Bank checking (or even the 5.5% you can get from Eloan.com; however with Eloan.com, you do need to shuffle the money around since you cannot directly transfer the money into the brokerage using the strategy described below).

Many investors set up a “cash trading account” at the discount broker, transfer money into the brokerage, and then let the money sit there for a while (could be a week or several months) before investing.

For a “cash trading account”, this is necessary because the money must be in the account before any stock purchase can be made, never mind the fact that any stock trade settlement (when the payment is actually made) is actually three business days after the trade. The drawback to this is that by keeping cash at the brokerage, your money is not working as hard as it could be.

To maximize on interest earnings while waiting for the opportunity to invest, you can set up a “margin trading account” instead. This requires a minimum of $2000 in equity at most brokerages. After the account is set up, you will usually be given a purchasing power equal to the amount of equity in the account. A purchasing power of $5000 means that you can purchase stocks of up to $5000 in value without holding additional cash balance in the account.

This is great because it means that, for example, if you have $5000 in stock equity in the account, you can purchase any additional stock that you want, up to a value of $5000, without the need to hold any cash balance at the brokerage at the time when you make the purchase.

After the trade, if you transfer in the payment before the end of three business days (settlement date), you will not be charged any margin interest. Obviously for this to work, the brokerage should support a fast and free means of money transfer; any brokerage which supports the ACH network will usually work.

(A word of caution: do verify with the brokerage on when they start charging margin interest and when they credit your account with the ACH-in funds.)

Using this strategy, you can continue to have your cash earning at the high interest rates at online banks, while not losing the opportunity to invest at a time attractive to your investment goals.

Please be aware that if you do not transfer in the money before the end of the three business days, you will start accruing margin interest, and may be subject to margin calls and forced sales if the market turns south. This is certainly not a situation I have in mind when writing this post. I certainly do not advocate buying stocks on margin.


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Yet another post on Sogoinvest

I have written many posts on Sogoinvest (you can search for them under this category, the latest of which was Positive steps taken by Sogoinvest). This is yet another post on Sogoinvest; this time I have two positive things to say about them.

The first is related to the margin charges that were levied on my account in August when they were changing and finalizing their ACH timeline. I wrote them a polite secure mail, pointing out that I had relied on their customer service’s reply to time my transfer of funds into Sogoinvest in order to avoid margin interest. In the mail, I asked that they waive the margin interest charged.

I received a prompt reply about half an hour later: they were unable to waive the charges but they will credit me with free trades to compensate me. The number of free trades (based on $1 per trade) happens to be the amount of margin interest charged. I think this is a reasonable resolution.

The second issue is related to the trading fill of one of the trades I made. I submitted a limit order to purchase 50 shares of VWO this afternoon at $66.30 and it was filled at $66.26 around 12.57pm PDT. This was a good fill as the lowest transacted price at that time was $66.31 and the bid and asking prices at that time were $66.26 and $66.37, respectively. No transaction was reported on level I at $66.26, so I felt like I had bought below the “market” price. 😉

The level I quotes are shown below:

2006-10-03-vwogoodfill.png
Overall, I am happy to continue my ETF investments with Sogoinvest.

Trade for free at Zecco?

2006-09-25-zecco.pngI read about Zecco several days back on FWF. According to the original link, Zecco supposedly will allow customers to trade stocks for free, much like the predecessor of Izone, Freetrade.com. It sounds interesting but if trades are free, it makes one wonder about the viability of the business model.

Details of the trading plan at Zecco are not out on the website. But, let me start the ball rolling by listing the wish-list for features I would like to see:

  1. reasonable minimum investment (e.g. $1000 or $2000),
  2. supports margin account,
  3. supports ACH in and out with reasonable time schedule (no lengthly funds withholding time),
  4. trades settle on the normal day T+3 schedule,
  5. no ACAT (transfer out) fees,
  6. no inactivity fee,
  7. supports both market and limit orders,
  8. ability to change the limit order price with one step, instead of a cancel-and-resubmit,
  9. no separate per share trading fee (do not want for example $0.01 per share beyond 1000 shares), and
  10. supports tax-lot specification sales.

I guess if there are no ACAT fees and it supports limit orders, it does not harm much to try out Zecco when it debuts since you can always transfer out for free if you find that you don’t like them.

2006-09-29-zecco-free-trades.png

Additional note on tax-lot specification sales

Regarding the tax-lot specification, it is useful in the taxable account where an investor can specify, for example, to sell a specific “lot” of shares to minimize on taxes.

Fairmark has one very good section on specifying tax-lots. The link is

http://fairmark.com/capgain/ident.htm

The link covers a lot of detail but actually, there is very little additional work that a brokerage needs to do. The investor could for example send the following message to the broker:

“For my trade placed on 9/20/06 to sell 100 shares of QQQQ, please match it to my purchase made on 5/25/2006”.

The broker simply needs to quote the request and reply with

“Your request is acknowledged”.

Although the question of whether email acknowledgement is acceptable was raised at Fairmark, I think it is a reasonably small risk to take with email acknowledgements versus paying the tax based on un-optimized tax-lot sale.

An alternative method (like Brownco used to do) is to provide a space in the trading screen for investors to key in a custom tax-lot specification message which will be printed in the trade confirmation. No additional work is needed from the broker in this case.

By the way, Ameritrade Izone supports this email acknowledgement scheme, although they do put in a disclaimer that “Ameritrade Izone makes no determination or assertion regarding the legal sufficiency of the email acknowledgement under IRS regulations”.