What are the pros and cons of investing on margin?
When it comes to margin investing the pros really have to do with the low interest rate you're going to receive on that loan to yourself. And the reason for that is that its a securitized investment, you have these investments there, so that interest rate is really low. And on top of that you have the ability to deduct margin interest against investment gains, and so the deductibility of that interest makes the effective cost of that loan even lower. That's the real advantage of it. And if you need money in a short term or medium term period of time, you can actually lend yourself money from your securities as opposed to being forced to sell securities which might be a taxable event if you're realizing capital gains in the sale of those investments.The cons have to do with the call provisions that can happen relative to a margin loan. So if you have this margin loan of $500 on a $1000 investment and its all in stocks, and the stock market goes through a really bad period, and your portfolio goes down in value, you have less securitized monies making that loan secure. And the brokerage firm can come back and really want you to pay back that margin loan and you might not have the money to do it.So that "call feature" makes it possible that you can be forced to sell securities in a down market, which generally is not when you want to be a seller.
