The Differences between Individual Margin Accounts and Revolving Credit?

It’s noon the day after Donald Trump has been victorious in his comeback cementing his Re-Election as President of the United States, and the country is electrified and the Stock Market is Roaring to all time heights today. But did you know? You can use you Securities as collateral to finance a loan? Yep! So I felt the need to share more about this today. Hmmm…It’s true!

Imagine yourself in the world of business and your a entrepreneur and all of a sudden you find yourself needing to use some debt to pay for your liquidity crisis? It happens and happened to me recently here is what I learned!

Credit Types

First before we dive into Margin Accounts that Banks Offer, we first must distinguish the two different types of Credit. The first type is Short term high interest credit. This credit type is usually one year or less and has a higher Interest rate because of the convenience it offers consumers. Just like in the Bond market the second type of credit is moderate to long term credit. Depending on the time involved with your credit needs? Moderate to long term credit is longer than one year and shorter than 10 years. This credit facility is used to offer borrowers lower interest rates.

Endowment Funds are a unique topic alone. Read all about this topic I wrote HERE!

Margin Vs. Short Term Revolving Credit

It seems I must share some quick facts and differences about Margin and Short Term Revolving Credit. Margin is credit offered by a Investment Bank that is lent to a individual who has a Brokerage Account with securities as collateral. It is usually high interest credit and short term. Margin credit works like this, Your portfolio of Securities of Stocks, Bonds, Mutual Funds and Investments held in your Brokerage account act as collateral for the Credit granted by the Bank.

It also must be pointed out that it’s highly likely you must have at least Fifty Thousand to One Hundred Thousand Dollars minimum invested in your Brokerage Account before the Bank will grant you a Securities Backed margin account. Under Finra rules a Bank is not allowed to grant credit of more than fifty percent of the total Securities held in the persons brokerage account. Example: If I have Fifty Thousand of Blackstone Stock in my Brokerage Account? The Bank can lend or extend me Fifty Thousand dollars on Margin. This credit is not to be used for purposes of Trading securities. It must be used as cash on anything else except Investments.

Revolving Credit | Credit Cards

According to Investopedia Revolving Credit is explained best by:

How Revolving Credit Works?

When a borrower is approved for revolving credit, the bank or financial institution establishes a credit limit that can be used over and over again, all or in part. A credit limit is the maximum amount of money a financial institution is willing to extend to a customer seeking funds.

Revolving credit is generally approved with no date of expiration. The bank will allow the agreement to continue as long as the account remains in good standing. Over time, the bank may raise the credit limit to encourage its most dependable customers to spend more.

Did you read my Page and Investment Portfolio? HERE.

Borrowers pay interest monthly on the current balance owed. Because of the convenience and flexibility of revolving credit, a higher interest rate typically is charged on it compared to traditional installment loans. Revolving credit can come with variable interest rates that may be adjusted. The costs of revolving credit vary widely:

So as you can see and imagine this can be a complex topic of discussion and to explain. However I like to keep thing simple and straight when I am writing. To sum up Securities Backed Lines Of Credit? It’s a Bank Loan that is deposited into your Brokerage account with the expectation that you will pay it back and use your Securities or Investments in the Account as collateral for the Loan. It’s that simple.

Larry Ellison loves his margin Account so much he uses it regularly for very large purchases. In fact if you want to read more on the topic? I would highly suggest you read this article by Forbes.

“How the Richest Public Company Executives use their Stock to have access to Billions.”

Speaking about Billions My Good Friend and Fellow Value Investor and Investment Advisor Mr. Bogumil Barnowski has built a Fantastic Podcast “Talking Billions” and Finance Professional Presence. Click on image.

Mr. Barnowski’s Podcast and Advisory Practice is incredibly interesting. Soon I will have to do a interview or post all about his Life as a Professional Advisor to High Net Worth Families.

SBLOC’s

As I conclude this Post about Margin Accounts and Securities Backed Lines Of Credit (SBLOC’s) Id like to leave you with this thought. Securities Backed Lines of Credit are more convenient than most other Lines of Credit. After all Securities are Asset’s just like a Home is a Asset to most Americans who invest into a Mortgage and store and grow their wealth using this method. However I would disagree with the thought “A Home is a Asset.”

I was taught by Investment Bankers as a Investment Advisor and as a Qualified Advisor? I do not feel a Home is a Asset. It is indeed a Liability. The upkeep and maintenance costs alone will erode and defy the mere fact your trying to create wealth for the future. I prefer my assets to be cash producing Investments. Buying Companies is a great way to build wealth as a Investor. At least you know if your wealth is increasing. Anyway’s I am getting off topic.

Using Securities Backed Lines of Credit

Securities Backed Lines of credit can incredibly useful as a Business owner or as extra source of finance when you find you need the convenience of fast money. As a Entrepreneur this can be incredibly useful and easy. The thought you can deposit income then buy stocks and bonds over time using your Income will no doubt generate wealth for you as a Entrepreneur.

Be Responsible With Debt and Credit

I would like to leave you with this one thought. What better way as a entrepreneur is there than taking the income we make from our Careers or Businesses than to deposit into a Brokerage account and buy Investments? Then when we have built up a small fortune with our stocks and bonds and investments? We can begin using them as assets to generate new strategies to building wealth.

I would argue that it could be risky if you don’t use this responsibly. However even thought with this said? If Larry Ellison and Elon Musk can use this for their convenience? To me that just seems like a convenient and winning strategy. It no doubt is bullish and capitalistic. Thank you for reading.

Godspeed
JS