Ed -- I have a lot of my net worth tied up in equities, but I would NEVER put my HOUSE up for collateral to finance a stock purchase -- just not a very wise investment choice. Investment capital should only be money you don't need for an extended period and can live without if things go the wrong way -- (they sometimes do ....) My rule is to be able to sleep nights even if the market takes a bad turn. I don't think I could be that relaxed about it if I knew my home was on the line.

In all fairness, you were speaking of relatively small amounts of capital and probably would not over extend yourself, but as an investment strategy -- just not a good one for the average person.

Hi Dave,

I said that I would not borrow for current consumption, but might to buy goods that would last for a period, eg. car, table, house.

I didn't say what collateral I was using for the loan, as I was dealing with another issue.

Actually, the collateral undergirding the loan is stock and (equity-based) mutual funds.

Couldn't be my house - I don't own one.

I didn't say it a the time, but I don't borrow up near the limits what the (current value) of my collateral will support, either.

If the value goes down, the lender wants either more collateral ... or cash ... so that their margin is maintained.

And they want it today - tomorrow, at the latest.

Or they sell some of the collateral, quite likely at a depressed price.

Which means that there's less collateral left.

Which means that the amount of loan that they'll allow covered by it is lower, as well.

Not a good box to be in - I don't want to get margin calls.

Good wishes for using your money wisely.

ole joyful

Ahh .. Margin trading -- now THAT's a different story. As you have explained, when you use stocks for collateral, your brokerage house keeps you under a watchful eye and won't LET you get over extended. Yeah -- margin calls are a real PAIN!
Again .. it's a method best left to seasoned investors and in point of fact requires (at least in the US markets) higher levels of qualification to participate. (But the rates are somewhat attractive....) I still prefer to own my securities outright.

You confused me a bit with the reference to "secured line of credit" -- for most folks this translates to HELOC.

Sorry for the confusion ....

Dave - crowding 100?

My loan is with the bank, not the broker.

But they, too, keep an eye on the value of the asset undergirding the loan.

One of my brokerage accounts has been charging me a fee annually for keeping an inactive account - others don't, so I asked that broker what could be done about it.

He said, "Nothing".

So I said, "Get one of my holdings to be issued in certificate form, and write me a cheque for the cash balance in my account".

He had certificates issued for two holdings, the second for a small amount (price $50.00 each certificate) and told me that no certificates could be issued for a third (index-following holding). And I got the cheque.

So, I plan to have that account changed to their house's discount system, which doesn't charge such fees, I understand.

So, I plan to take the first certificate to lodge with the bank to increase my collateral - may as well give them the other certificate, as well, in case I lose it, otherwise.

Also, I can have them set a credit limit on the account - which currently is somewhat lower than the margin level (50%) required.

Most financial advisors here say that most every employee should have a deferred-tax retirement account, with current deposits, within limits, being deductible.

But - on withdrawal, every dollar is taxed at full rate.

I preferred, in the later years of my working career, to pay my (low marginal rate) tax currently, which left me with about 75% of the pre-tax amount that the retirement plan guys had available.

Then borrow about half of the limit that the bank would allow, leaving the stuff purchased with the loan with them as extra collateral.

The dividends on Canadian stocks are taxed at a low rate, so I'd use the ones from the loaned amount, plus some of that earned on my own invested money, to pay the interest on the loan.

And the interest on the loan, as it's used for investment, is deductible, so I'm paying peanuts tax now, if any.

When I liquidate, though, I deduct the amounts originally invested, to find my capital gain.

And pay tax at regular rate on only half of that.

Fewer restrictions, into the bargain.

I like them apples better.

Good wishes for skillful use of your income and assets.

ole joyful

Ding, ding, ding...Margin account. Now I get it. Like a margin account, though not through the broker.

I have thought of doing that in the past, but didn't like the interest rate of the account, so just never did it...that, and I did not consider myself quite knowledgeable enough to do it.....and wasn't near as secure then as now.

It used to be that I could get a very attractive loan rate with my credit union with a 'stock secured' loan, and use it for anything I wanted.

I sent them x number of certificates, and they sent me x amount of dollars on loan. Once, when the stock price dropped quite a bit, they had me send them a few more certificates. They don't do it any more.

They do though have rates a lot more attractive than the local banks....

Sue

Hi chemicals that'd curl yer hair,

As I mentioned, this seems a useful strategy for Canadians as an alternative to a tax-deferred retirement fund.

Here, if I borrowed to invest in the tax-deferred retirement system, interest paid on the loan is not deductible.

If I borrow to purchase stocks outside of the tax-deferred system which have a good possibility of being profitable, the interest is deductible.

When in regular account I buy Canadian stocks that pay dividends, I pay tax on them at a much lower rate - 4% interest earnings and 3% dividend earnings produce about the same after-tax result. If that dividend income is in my tax-deferred account, that tax benefit is lost.

If I invest to earn interest, usually the value of the underlying asset, while it can't shrink ...

... it can't grow, either.

So - all that it will ever earn for me is earned - NOW!

And taxed now - at top rate.

But - the value of the underlying asset deteriorates each year, due to the depradations of inflation ... which means that I must put part of current earnings with the asset in order to preserve purchasing power.

I expect that you've read my story about the two rats that eat your cheese.

But - if I borrow to invest, and pay interest-only on the loan each month ...

... a few years down the road, I pay back precisely the number of dollars that I borrowed.

Each one of which will buy less than when I borrowed it, so I gained from inflation.

One wants solid, strong companies in his/her projectred retirement fund, and share prices of such companies tend to stay more stable during down markets ... especially if they are paying a fairly good dividend.

If I buy a stock inside of the tax-deferred account, when I sell it, if before the time that I'm to withdraw it, I pay no tax on the capital gain, either, at that time.

But the problem is - that when I withdraw funds from that account, which I must do, beginning at age 70, I must add every dollar to my income at the time that I withdraw, with no deductions - and whether or not I'd prefer another course of action, e.g. if I had a substantial other source of income in one year, to put me into a higher tax bracket. And I'm required to withdraw an increasing percentage annually, to 20%, I think it is, at age 90 and at that rate annually from then on.

In the regular system, if prices of the stocks that I've bought go up, when I sell them (or die) I deduct the amount that I paid originally, then pay tax on half of the gains, at regular rate - but I pay no tax on half of that gain.

When I invest in stocks inside the tax-deferred system, I lose the tax advantage of both the dividend tax credit, and of the deductibility of half of the capital gain.

If I hold those quality stocks for long periods, which I tend to do, I don't have to answer to the income tax people till I sell them, which gives me most of the advantage gained by the people who use tax-deferred retirement accounts.

When the value of my assets increase, I laugh some.

If they go down, I cry a bit.

I don't want to be in a position where I must get out at a time not of my choosing.

And as I showed you in the message to you the other day - the major composite index in the U.S. has always been up in the last 50 years, give it a 10 year span.

You expect to be around for more than that, don't you?

If not - no doubt your kids will ... and if they inherit a stock that's doing well, they'll not likely dump it.

However - if I buy a chunk of the index here, I can't get share certificates issued, which means that I can't use them as collateral for a loan at the bank - but I can from the broker (as far as I know).

Broker's interest rate charged is usually about 1% above the rate that the bank charges.

Ideologically speaking, I'd rather do business with the local credit unions, but the rates that they charge are usually substantially higher than those charged by the bank.

I've had gains, and I've had losses, but I've never been caught where I had to sell stocks when the market was low in order to keep the bank off of my tail.

As some people in the investment group that I've attended for years say - "Losses are the tuition in the learning-how-money-works game".

Good wishes for your skillful participation in that game.

ole joyful

behavior Kelton (from "Household Finances" forum),

I brought this thread back to the top again, to make it easier in case you come looking for it, as I mentioned.

ole joyful

Some newcomers who have not seen this message before may find it interesting.

ole joyful