# Leveraged investing - general questions



## jumbalaya123 (Feb 20, 2017)

Hi,

I currently have 400k from my HELOC invested in ETFs in my non-registered account at questrade. I see that my buying power is 900k+ that account.

1) if I day trade with that 900k, will it affect the interest deductibility of my HELOC? (I'm guessing no, but would like to make sure)
2) what is "maint excess"? can someone give me an example with numbers? I realize you have to keep it above 0 to avoid a margin call, but under what circumstances would it drop? for example, if the stock bought on margin drops $1, does maint excess drop by $1?
3) my plan is to day trade and sell when it hits a 0.25-0.5% gain. does anyone have any tips/comments?

more questions to come, I'm sure.

thanks!


----------



## Argonaut (Dec 7, 2010)

Probably not what you want to hear, but will say anyway. You're essentially using your house as collateral to day trade. Stop, no, and don't.

Day trading will make the interest deductability a nightmare to calculate as well. All in all this may be the worst idea of all time.


----------



## jumbalaya123 (Feb 20, 2017)

how hard is it to hit say a 0.25% gain over a few days? as it's hard to buy at the very bottom, it's just as hard buying at the very top. Open to suggestions.

question: why does interest deductiability get affected? any interest incurred was from borrowing money to invest. I should be able to claim all of it (the HELOC interest and the margin interest)?


----------



## TomB19 (Sep 24, 2015)

The last statistic I heard was that 90% of day traders lose money but all of the day traders in here make money, so you might be OK.

This thread is like having your son explain to you his awesome idea for a face tattoo. You try to talk him out of it but you know it's going to happen and you know how it's going to affect his life.

Give it a try. It might be righteous. lol!


----------



## Mookie (Feb 29, 2012)

Big money leveraged day trading... Hope you know your way to the homeless shelter because you're gonna need it soon.


----------



## zylon (Oct 27, 2010)

*interest expenses*

Don't forget this tidbit from CRA which I have underlined, bold, and red.

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/221/menu-eng.html

"Claim the following carrying charges and interest you paid to earn income from investments:
(...)
- "most interest you pay on money you borrow for investment purposes, but generally only if you use it to try to earn investment income, including interest and dividends. *However, if the only earnings your investment can produce are capital gains, you cannot claim the interest you paid*."


----------



## james4beach (Nov 15, 2012)

As Argonaut said, don't use your house as collateral.

You can get crazy high leverage other ways that don't put your home as risk. Futures for example at 20:1. You're still going to lose your shirt, but at least you'll still have a home and your wife won't kill you.


----------



## jollybear (Jun 28, 2015)

Absolutely never day trade with money you can`t afford to lose. IMHO focusing on potential profit is the wrong way to approach day trading. It`s about executing religiously on a trading plan that you have proven to be profitable on a simulator first while being aware of a slew of other variables. It`s true most day traders fail because they are not willing to put in the work and maintain trading discipline.


----------



## mordko (Jan 23, 2016)

That's not why they fail. They fail because they are midgets playing a zero sum game against giants, who also happen to be professional experts.

Yet, in a way, all day traders succeed, just not in the way they intended. They successfully and charitably provide liquidity to the market as well as profits to the banks, which are owned by buy and hold investors.


----------



## doctrine (Sep 30, 2011)

I use Questrade. What jumbalaya123 is talking about is using margin on top of borrowed money from a HELOC. I think most rational people would agree that if you're going to day trade, don't do it with borrowed money. And especially at the top of the market. You may get 0.5% in a day, sure. The market can also go down 0.5% a day for longer than you think - days, weeks, even months straight down. It's irrational, but still very possible. Sometimes, losses accelerate. Markets down 0.5% one day, 1% the next, 2% the next, 5% the next. Leveraged/margin plays get wiped out and go to zero. Happens all the time.

As they say, the market can stay irrational longer than you can stay solvent.


----------



## hboy54 (Sep 16, 2016)

Hi:

I swear I saw a shoeshine boy giving investment advice the other day ...

Hey, I like leverage, likely nobody around here uses it more than I do. I would not be inclined to day trade with it. I would not be inclined to day trade without it. I would be inclined to wait the 5 days or 5 years for the next time TSHTF to start leveraging. Personally, I am reducing leverage these days. Things can't go this well forever.

hboy54


----------



## BoringInvestor (Sep 12, 2013)

jumbalaya123 said:


> how hard is it to hit say a 0.25% gain over a few days? as it's hard to buy at the very bottom, it's just as hard buying at the very top.


Thanks for sharing your thinking on this.

I have a few questions
i) What would you do if you you didn't make a 0.25% gain after holding it for a few days? Would you sell for a smaller profit/for a loss, or keep holding?
ii) Is the 0.25% net of transaction costs/commissions?
iii) Doing some quick math, if you made 0.25% consistently per week for an entire year (52 weeks), you'd have earned close to 14%. Do you expect you can trade profitability to the tune of ~14% per year?


----------



## jumbalaya123 (Feb 20, 2017)

re: interest deductibility, see canadianmoneyforum.com/archive/index.php/t-2150.html. almost any stock has the potential of declaring a dividend.

if I didn't make 0.25% in a few days (net), I'd hold. buying blue chip stocks like bmo, rogers, Manulife, etc.

0.25% net, considered the 5.2% that questrade charges a year (compounded daily), transaction fees, capital gains tax.

I actually made 0.58% in one day already so if I lose some, that's fine.

doctrine was right regarding what I was using. I'm not touching the HELOC money... that has been invested in ETFs and is up 60k in 2 years. I can use some of that to cushion a loss if necessary.


----------



## jollybear (Jun 28, 2015)

Your strategy does not make sense.....you want to be a scalper until you have a losing trade (which will probably take a day) , at which time you will become a buy & hold investor. What if today was the peak of the market and we cycle lower for the next year?


----------



## mark0f0 (Oct 1, 2016)

zylon said:


> - "most interest you pay on money you borrow for investment purposes, but generally only if you use it to try to earn investment income, including interest and dividends. *However, if the only earnings your investment can produce are capital gains, you cannot claim the interest you paid*."


That quote just means that you can't invest borrowed money in, for instance, gold or silver bullion, and expect to be able to deduct financing costs. If your investment is in the equity or debt of an active business, there's no reason why borrowed money cannot have its interest deducted.

It does not mean, for example, that a non-dividend-paying stock won't be allowed the deduction.


----------



## james4beach (Nov 15, 2012)

jollybear said:


> Your strategy does not make sense.....you want to be a scalper until you have a losing trade (which will probably take a day) , at which time you will become a buy & hold investor. What if today was the peak of the market and we cycle lower for the next year?


This is exactly how day traders end up getting destroyed in bear markets. They scalp on the way up for tiny little profits, and then hold (in denial about losses) on the way down.


----------



## lifeliver (Aug 30, 2010)

I've been day trading some momentum stocks for last couple of months and its not an easy game. Get ready to lose in the beginning. Start on a simulator and then trade live with small position size or your emotions will get the best of you.


----------



## lonewolf :) (Sep 13, 2016)

mordko said:


> That's not why they fail. They fail because they are midgets playing a zero sum game against giants, who also happen to be professional experts.
> 
> Yet, in a way, all day traders succeed, just not in the way they intended. They successfully and charitably provide liquidity to the market as well as profits to the banks, which are owned by buy and hold investors.


 Not even zero sum game takes a lot of money to keep the markets well oiled. Playing against some of the smartest, most powerfull corrupt men in the world


----------



## lonewolf :) (Sep 13, 2016)

borrow money to day trade if make money could be taxed as business. Market drop by 90% then your wiped out


----------



## Eclectic12 (Oct 20, 2010)

mark0f0 said:


> That quote just means that you can't invest borrowed money in, for instance, gold or silver bullion, and expect to be able to deduct financing costs. If your investment is in the equity or debt of an active business, there's no reason why borrowed money cannot have its interest deducted.
> 
> It does not mean, for example, that a non-dividend-paying stock won't be allowed the deduction.


Odd ... from what I recall of CRA's bulletin, it says that if the company has a policy to not pay dividends, CRA will disallow the interest deduction. 

I seem to recall it was the Finance department that wanted the exclusion for CG only but CRA's take on it was that since non-dividend payers have a history of starting to pay dividends, they wouldn't bother with it unless there is an explicit statement by the company.

Of course, should the gov't of the day direct CRA to enforce what the Finance department has written up, it may change.


I'll have to dig it up and re-read it when I get a chance to see if anything has changed since I last read it in detail.

Cheers


----------



## Eclectic12 (Oct 20, 2010)

jumbalaya123 said:


> re: interest deductibility, see canadianmoneyforum.com/archive/index.php/t-2150.html. almost any stock has the potential of declaring a dividend.


Sure ... and while the Finance department wants the CG only gains stocks to have the interest deduction disallowed, CRA's bulletin says they won't bother with it as there is the potential of the stock starting to pay income (dividends or mixed). CRA does say that should the company make an explicit statement of no income/dividends, then the interest deduction won't be allowed. I'm not sure how many have explicit policies or statements along those lines.

Private shares seem to be a different matter.


> In a 2013 Tax Court Case, Swirsky v. The Queen, Ms. Swirsky *was denied an interest deduction because there was no evidence that, at the time the shares were purchased, she believed or expected that dividends would be paid on the shares in the future*.
> 
> At the time, there was no history of the company paying any dividends. This case was about a purchase of privately held shares, so is different from a purchase of publicly traded shares ...


http://www.taxtips.ca/personaltax/investing/interestexpense.htm


Since you mention having ETFs, another source that reduces the interest deductible is being paid return of capital (RoC), which it seems a lot of ETFs pay. According to the article I read, officially, one is required to pay down the investment loan by the amount of RoC paid to keep the full interest tax deductible then re-borrow it. The article quoted an accountant as saying as long as the RoC was re-invested, it would be the same thing.




jumbalaya123 said:


> ... if I didn't make 0.25% in a few days (net), I'd hold. buying blue chip stocks like bmo, rogers, Manulife, etc.


The good part of the blue chip stocks is that most seem to pay dividends and there's no RoC to worry about. 

I am not clear on the strategy ... are cash payments buying the blue chip stocks? Fresh money from the Heloc?



Where it's margin, a couple of factors to have a plan for are:

a) drop in stock value triggering a margin call.

b) stock that used to be accepted for margin being dropped (I seem to recall a post about a small brokerage sending an email that an ETF that used to be allowed was no longer being allowed, changing the risk of a margin call.

c) whatever drives the margin interest rates up.


Cheers


----------



## jumbalaya123 (Feb 20, 2017)

the strategy is to use the buying power that Questrade gives (borrowing on margin). I have 400k in equities (340k borrowed from HELOC to get that). questrade gives another 900k in buying power based on the amount of equity I have. I'm using the 900k (or a part of it) to buy blue chip stocks.

for a margin call to be triggered, I believe for certain stocks it has to drop 50%? 

margin interest is 5.2% a year, 5.2%/365 a day. it's tolerable.


----------



## TomB19 (Sep 24, 2015)

Please do it and let us know how it goes. If it goes well for you, I will consider doing it.

I've never read a first hand report of someone losing money day trading, on this site, so I'm sure you will be fine.


----------



## janus10 (Nov 7, 2013)

jumbalaya123 said:


> the strategy is to use the buying power that Questrade gives (borrowing on margin). I have 400k in equities (340k borrowed from HELOC to get that). questrade gives another 900k in buying power based on the amount of equity I have. I'm using the 900k (or a part of it) to buy blue chip stocks.
> 
> for a margin call to be triggered, I believe for certain stocks it has to drop 50%?
> 
> margin interest is 5.2% a year, 5.2%/365 a day. it's tolerable.


No, that's not right. If you are at your max margin, even a small drop can force you to sell your positions.

I haven't had a margin call in years. Very gut wrenching experience.

In my margin account I have almost $1.7M available for margin but I may still only be allowed to buy $850k in stock.

Options, futures, forex have different margin setups. Doing a calendar spread is very margin friendly.

Interactive Brokers has very low margin rates maybe the best in Canada.


----------



## jumbalaya123 (Feb 20, 2017)

yes I realize that, so I'm actually not using the 900k. maybe 600k.

why would you only be limited to using half of that to buy stock? buying power is buying power... but the more conservative move is to use less than buying power to avoid margin call.

IB is good, but that would mean selling everything (cap gains) and re-buying over at IB, which is just too costly. anyway, 5.2%/365 (interest deductible as well) is tolerable.


----------



## janus10 (Nov 7, 2013)

jumbalaya123 said:


> yes I realize that, so I'm actually not using the 900k. maybe 600k.
> 
> why would you only be limited to using half of that to buy stock? buying power is buying power... but the more conservative move is to use less than buying power to avoid margin call.
> 
> IB is good, but that would mean selling everything (cap gains) and re-buying over at IB, which is just too costly. anyway, 5.2%/365 (interest deductible as well) is tolerable.


You can transfer over your investments in kind so you don't have to sell them.

The rules of margin are not only different between types of investments but even within different groups (e.g. Natural Gas vs. Lean Hogs).

I don't make the rules, I just follow them. I used one US listed stock that is somewhat volatile as an example. If I used a Canadian listed fixed income ETF maybe the numbers would be different. Plus, I am about half cash, half invested in this account.


----------



## Woz (Sep 5, 2013)

jumbalaya123 said:


> yes I realize that, so I'm actually not using the 900k. maybe 600k.
> 
> why would you only be limited to using half of that to buy stock? buying power is buying power... but the more conservative move is to use less than buying power to avoid margin call.
> 
> IB is good, but that would mean selling everything (cap gains) and re-buying over at IB, which is just too costly. anyway, 5.2%/365 (interest deductible as well) is tolerable.


I don’t think you completely understand how your margin requirement works. If you used $600k of your margin you’d have a margin call when the market drops more than 14.3% assuming a 30% margin requirement. 

Your present assets and equity is $400k, liabilities is $0. If you buy $600k worth of stock your assets are $1,000k, equity is $400k, liabilities is $600k. You’ll get a margin call whenever your equity divided by assets is less than 30%. If your stock drops 15%, your assets are $850k, liabilities is still $600k, equity is $250k. Your margin is then $250k/$850k = 29% i.e. margin call.

If you wanted to be able to survive a 50% drop without a margin call then you’d need to limit your margin borrowing to $215k.

Buying power does depend on what assets you’re purchasing. From the sounds of it your listed buying power is based on a 30% margin requirement which applies to eligible stocks (see http://www.iiroc.ca/Rulebook/SuppSched/LSERM-list-of-securities-eligible-for-reduced-margin.html for list). Other stocks are 50% and for some penny stocks they’re not eligible for margin at all. If you were purchasing stock not on that list then you’d only be able to use 40% of your buying power.


----------



## jumbalaya123 (Feb 20, 2017)

great explanation of margin requirement, thanks! part of my assumptions is that stock won't drop 10%+ in a few days, especially these blue chip stocks.


----------



## Woz (Sep 5, 2013)

Just to circle back to your initial question (2) as I’m not sure anyone answered it. Your maintenance excess is the equity you have in excess of your minimum margin requirement. There’s a few ways to calculate it / think about it but it should all lead to the same number. Again assuming a 30% margin requirement for all this. If you have $400k equity in the form of your ETF then your buying power is ($400k/0.3 -$400k = $933k). Your maintenance excess is the maintenance margin required on your buying power ($933k*0.3 = $280k). For your current account, that means you could either withdraw $280k or purchase $933k of stock. If you withdrew funds your margin would be ($120k/$400k = 30%).

If instead you bought $600k worth of stock your buying power would be decreased to $333k and your excess margin would then be ($333k*0.3 = $100k). Every $1 of stock you purchase decreases your excess margin by $0.3. If the stock had a margin requirement of 50% then every $1 of stock would decrease your excess margin by $0.5.

A decrease in your stocks value would also decrease your excess margin. A $1 decrease in your equity will decrease your excess margin by $0.70. $0.5 if it’s a 50% margin requirement. It is based on your equity not assets so the more leveraged you are the more your excess margin will drop for an x% drop in the market.


----------



## jumbalaya123 (Feb 20, 2017)

thanks, that was the exact explanation I was looking for. however your last paragraph should mean 1 decrase = 0.3 decrease of excess margin?


----------



## andrewf (Mar 1, 2010)

jumbalaya123 said:


> great explanation of margin requirement, thanks! part of my assumptions is that stock won't drop 10%+ in a few days, especially these blue chip stocks.


That is a bad assumption. When the market melts down, no chip is blue enough to save you from this kind of volatility.


----------



## Woz (Sep 5, 2013)

No, I meant $0.7. A $1 drop in equity reduces your excess maintenance by $1. It’d be the same as if you withdrew the money. However, if that drop in equity was due to a drop in asset price then that also means your assets drop by $1 which decreases maintenance margin and increases your maintenance excess by $0.3. Net effect is -$0.7 (+$0.3 – $1 = -$0.7).


----------



## TomB19 (Sep 24, 2015)

To be fair, not all stocks dropped 50% in 08. They all took a hit but a few were far less impacted than others.


----------



## humble_pie (Jun 7, 2009)

TomB19 said:


> To be fair, not all stocks dropped 50% in 08. They all took a hit but a few were far less impacted than others.



the market nadir was reached in march/09. IIRC the chartered banks i follow (3 of them) all crashed 50%. Their lows were brief - sharp V-shaped troughs - but they touched down 50% tout de même.

.


----------



## james4beach (Nov 15, 2012)

TomB19 said:


> To be fair, not all stocks dropped 50% in 08.


That's right. Some dropped much more, including many respected "blue chip" stocks and "solid dividend payers". For estimating risk, one should use the pessimistic end of the figures, not the market average.

Citigroup (C) dropped -98% ... yes even with dividends (rolls eyes)
General Electric (GE) -82%
Bank of America (BAC) -93%
Goldman Sachs (GS) -80%
CIBC ... the beloved Canadian ... -61% ... yes with dividends!!

How quickly we forget, eh?

I was working near Bay Street at the time. I went into some of the banking towers to join people watching the big boards. Don't ever underestimate equity risk. They have high returns for a reason!


----------



## Eclectic12 (Oct 20, 2010)

james4beach said:


> humble_pie said:
> 
> 
> > the market nadir was reached in march/09. IIRC the chartered banks i follow (3 of them) all crashed 50%. Their lows were brief - sharp V-shaped troughs - but they touched down 50% tout de même.
> ...


True ... from what I recall reviewing of what I held at the time, a few dropped 60%, financial stuff was 30% to 50% and a few went up instead of dropping. 




james4beach said:


> For estimating risk, one should use the pessimistic end of the figures, not the market average.


True ... though I would think one would also want to factor in one's ability to trim what one holds. Trimming a four bagger then rebuying at half price worked in my favour, with at most one dividend sacrificed. One does have to be sure one will take the action instead of looking at drops from the high.


Cheers


----------



## TomB19 (Sep 24, 2015)

I'd like to hear how jumbalaya123 is making out with day trading. Perhaps he has retired by now and no longer follows this site?

I hope he's doing OK. Many of us were scared for him so I would love to hear that he has proven us wrong.


----------



## doctrine (Sep 30, 2011)

TomB19 said:


> I'd like to hear how jumbalaya123 is making out with day trading. Perhaps he has retired by now and no longer follows this site?
> 
> I hope he's doing OK. Many of us were scared for him so I would love to hear that he has proven us wrong.


Isn't it amazing how many people with $500k+ show up on forums like this, ask for very basic advice, and then disappear? It's almost like everyone suddenly comes into hundreds of thousands of dollars through sheer luck and clearly don't even spend a few hours doing basic investing research, but instead consult random strangers on financial forums.


----------



## humble_pie (Jun 7, 2009)

doctrine said:


> Isn't it amazing how many people with $500k+ show up on forums like this, ask for very basic advice, and then disappear? It's almost like everyone suddenly comes into hundreds of thousands of dollars through sheer luck and clearly don't even spend a few hours doing basic investing research, but instead consult random strangers on financial forums.



it's true these do like plants. Possibly planted by the omnipresent finplan ETF sales force so they can repeat the couch message. Although the going amount in cmf forum to attract really serious attention these days is a fictional $1 million.

.


----------



## TomB19 (Sep 24, 2015)

I think this one was real. I know lots of people who think like this. In fact, I know way more people who think like this than I know people who are rational investors.

Particularly young people seem fall for all of the scams.


----------



## humble_pie (Jun 7, 2009)

TomB19 said:


> I think this one was real. I know lots of people who think like this. In fact, I know way more people who think like this than I know people who are rational investors.



ok _you_ might know lots of people who think like this, but how many of them suddenly wake up to find a cheque for $550,000 sitting on their desk, without their having the faintest idea how it even got there ... each:





> Particularly young people seem fall for all of the scams.



tomB if you look you'll see an amazing gang of young people in this forum. Pretty awesome in finance, they are. How come you haven't noticed em?

.


----------



## Eclectic12 (Oct 20, 2010)

doctrine said:


> Isn't it amazing how many people with $500k+ show up on forums like this, ask for very basic advice, and then disappear?


Not sure this applies to this OP ... I can recall the thread about when dividends are paid/what ownership is required to paid as well as multiple taxation threads about US partnerships as well as how to report taxable gains from selling MF units.


Cheers


----------



## humble_pie (Jun 7, 2009)

doctrine said:


> Isn't it amazing how many people with $500k+ show up on forums like this, ask for very basic advice, and then disappear? It's almost like everyone suddenly comes into hundreds of thousands of dollars through sheer luck



it occurs to me that maybe all these newbies who suddenly have 500,000 unexplained dollars & up are the new pot millionnaires

.


----------



## lonewolf :) (Sep 13, 2016)

jumbalaya123 said:


> the strategy is to use the buying power that Questrade gives (borrowing on margin). I have 400k in equities (340k borrowed from HELOC to get that). questrade gives another 900k in buying power based on the amount of equity I have. I'm using the 900k (or a part of it) to buy blue chip stocks.
> 
> for a margin call to be triggered, I believe for certain stocks it has to drop 50%?
> 
> margin interest is 5.2% a year, 5.2%/365 a day. it's tolerable.


 They can change margin requirements your playing against some of the smartest, most powerful, corrupt men in the world. If memory is correct I think it was the silver market that would not accept buy orders only sell orders when the Hunt brothers tried to corner the silver market which lead to the silver crash. NYSE margin debt close to all time highs follow the herd to financial ruin. To play this game you want to have developed the DNA that you can chose to be part of the herd or not be part of the herd.


----------



## jumbalaya123 (Feb 20, 2017)

I'm still around. making around a grand a day, not bad... snapchat was REAAAAAL good. I have had some losses but I can claim those. I was gonna just hold the losses but other buying opportunities showed up so I "had to" sell at a loss. just today made 1000 USD on BABA. it's only been what, half a month? so there's time for me to screw up but so far it's been fine. ready for GOOS IPO soon!


----------



## Rusty O'Toole (Feb 1, 2012)

jumbalaya I'm not going to knock what you are doing if it works for you. Day trading is a tough racket but some people make bank - for a while.

I will only suggest that you plan your trades so if it goes against you, you cover quickly and take a $200 - $300 loss. While if your trade goes your way you make $1000. With odds like that you don't even need to be right half the time to make money.

The people I know who got killed in day trading all made the mistake of holding onto losing positions too long. You may get away with it for a week, a month, a year, but sooner or later the bull market ends and you get wiped out.

The guys who never risked more than a few points, and got out and stayed out when the market turned sour are the guys who kept the money they made.


----------



## TomB19 (Sep 24, 2015)

It's good to hear from you, jumbalaya. It's great to hear you're doing well.


----------

