The Glass-Steagall Act was passed in 1933 to place a dividing wall between commercial banking and investment banking. It was in an effort to protect consumers and the economy from the risks of speculative investment banking. JP Morgan and other large institutions were targeted. The act was partially repealed and replaced in 1999 by the Gramm-Leach-Bliley Act. After 2008, some opined that the repeal of the original act contributed to the financial crises, and they instituted the Volcker Rule, which reinstated part of the original Glass-Steagall act. Continue reading...
In the high-stakes world of finance, rogue traders are a recurring, and often notorious, presence. A rogue trader is an employee of a financial institution who operates independently, often engaging in unauthorized, high-risk activities that can lead to substantial losses for both the institution and its clients. These traders, however, are only labeled as "rogue" when their gambles result in significant losses, creating a moral hazard that can have far-reaching consequences. Continue reading...
The act of “going on margin” means borrowing money from the custodian of your account, in order to purchase additional securities. Another way of saying this is that you are “leveraging” your account. Investors who go on margin are trying to pump up gains in their account, but doing so means taking the risk of outsized losses if you are wrong. To take an account on margin is not free - the custodian will charge interest for the loan, and will essentially use the assets in your account as collateral. Continue reading...
A margin trade is one where the trader uses other securities or cash as collateral, for a transaction in which he or she has not purchased the security outright. The broker acts as a lender. If your broker approves you for a margin account, you have the ability to purchase new securities “on margin” by using your current holdings as collateral, or by depositing 50% (or more depending on the broker) of the market price of the security into the margin account. Continue reading...
IIE is deductible from taxes, and is usually used to deduct the interest paid on a margin loan used to buy taxable securities, when there is a gain to offset. Investment interest expense is the term for interest which has been paid in order to hold an investment position. It comes into play when filing taxes. An individual can list interest expenses on a Form 1040. The most common place to incur an interest expense when investing is through the use of margin in an investment account. Continue reading...
When a mortgage loan is made to a consumer, the bank or loan institution is the mortgagee, while the consumer is the mortgagor. Mortgages are long term loans secured by the real property of the individual borrowing the money, and they are generally used for homes, called home mortgages. The lending institution, which might be a bank or a mortgage company, is the mortgagee, lending money to the homebuyer, who is the mortgagor. Continue reading...
In the event that a borrower is having issues making mortgage payments on time, they may try to seek a mortgage forbearance agreement to delay the foreclosure process. The mortgage forbearance agreement would specify the plan for resuming mortgage payments on time, and is designed to be a temporary solution to an unforeseen issue with the borrower (unemployment, health issues). Continue reading...
Some securities, such as penny stocks and IPOs, are prohibited from being purchased on margin or for serving as margin for other purchases. Stocks and other securities that are too volatile to serve as margin collateral - or to be purchased on margin - are called Non-marginable Securities. The Federal Reserve Board has defined certain criteria for determining which securities are non-marginable, and brokers often have their own house rules for traders. Continue reading...
Mortgage life insurance is any life insurance policy which covers the life of the borrower in a mortgage loan and assigns the mortgage lender as a creditor-beneficiary entitled to recoup their losses from the life insurance policy. The bank or lender will be designated as the assignee for the collateral of the life policy. Historically speaking, mortgage life insurance was a term policy with a decreasing death benefit, also called a face amount, that equaled the remaining amount due on the mortgage loan. As the home was paid off, the amount of life insurance required would decrease, and, in most cases, the premium with it. Continue reading...
A margin account is one in which an investor uses borrowed money to purchase additional securities. An investor is almost always required to use the securities in the account as collateral for the borrowed money. The objective of a margin account is for the investor to magnify gains, but the opposite can also be true, and losses may lead the investor to have to sell securities in the account to cover the loan balance. There’s more upside in a margin account, but there’s more downside too. Continue reading...
A margin call is a mandatory request by the custodian/broker for the account holder to add equity to the account, either by depositing cash or selling securities to raise cash. When an investor takes an account on margin, the custodian will require that they keep a certain amount of equity/cash in the account to maintenance the borrowed amount. If the account value drops past a certain level, the custodian may require the investor to add equity to the account to cover the margin balance. Continue reading...
Minimum margin is the minimum amount needed to open a margin account. The custodian or broker typically sets the minimum margin, but it cannot be for any less than the $2,000 required by the NYSE and NASD. What is 'Buying on Margin' and Margin Trading? What is a Margin Account? Continue reading...
Profit margin is a profitability ratio that measures, as a percentage, how much a company keeps per sale. Profit margin can be calculated by dividing net income by sales. A higher profit margin means a company keeps high percentage of each dollar sold as profit. For example, a 50% profit margin means that for every dollar earned, a company retains $0.50. It is often helpful for an analyst to look at how a company’s profit margins have changed over time, to measure whether it is becoming more efficient in the sales of goods. Continue reading...
Contribution margin measures how efficiently a company can produce a good relative to its variable cost. Goods with high contribution margins are the most profitable. The contribution margin can be helpful in deciding what goods can go on sale and for how much, and it allows management to decipher how to improve efficiency in production while keeping variable costs low. Additionally, if there is a bottleneck in the supply chain for an input that is used to produce two different products, management could use contribution margin to decide which product takes takes priority. Continue reading...
Mortgage brokers act as agents for consumers looking for the best deal possible on a home mortgage loan. Lenders at banks may not be able to find the most competitive interest rates out there. Mortgage brokers can help consumers become more educated about the various kinds of loans out there, some of which are subsidized by the government. Mortgage brokers find and place mortgage loans with consumers who need it to buy a house. Continue reading...
No-Cost Mortgages waive the initial closing costs by making a repayment structure for those costs into the interest payments on a mortgage loan. Closing costs can range from 2%-5% of the total cost of the home, and include attorney fees, underwriting fees, application fees, and so on. These costs are deferred and are paid in the form of additional interest on the loan. Closing costs are separate from down-payments of equity, and are a miscellaneous hodgepodge of a wide range of fees associated with closing a mortgage deal. These costs are sometimes covered by the seller, but most often they are paid by the buyer. Continue reading...
Freddie Mac is a government-sponsored company which purchases mortgages from banks and securitizes them for sales to investment banks or individuals. Freddie Mac is not a government organization, but was established by a congressional mandate in the 1970’s. It’s proper name is the Federal Home Loan Mortgage Corporation (FHLMC). The company’s purpose is to make mortgage debts into marketable securities by purchasing the mortgage risk and cash flow from banks and dividing into tranches which are sold to or through investment banking institutions. The securitized mortgages are known as Collateralized Mortgage Obligations, or CMO’s. Continue reading...
A maintenance margin is the minimum amount of equity an investor must keep in a brokerage account to cover margin balances. Under the regulatory guidance of NYSE and FINRA, an investor has to have in equity at least 25% of the total market value of the securities in the margin account. Depending on which brokerage firm the account is held, the maintenance margin requirements could be higher. According the the Federal Reserve’s regulation titles “Regulation T,” when a trader buys on margin they must maintain key levels of equity throughout the life of the trade. Continue reading...
Operating margin is a ratio (expressed as a percentage) that indicates how much a company makes for each dollar of sales. It can be calculated by dividing a company’s operating income by net sales, and generally a company that has a high and consistently improving operating margin is thought to be healthy. Operating margin can be looked at in terms of the overall company, or in a more focused vacuum - such as analyzing the operating margin of a new clothing line or an experimental sales project. Continue reading...
Collateral is an asset/property that a borrower commits to a lender in exchange for a loan, which will be forfeited if the borrower defaults. A loan that has collateral attached to it will generally carry a more favorable interest rate, but that is not necessarily always the case. Some examples of collateral are a house when you take out a mortgage, your car when you take out an auto loan, or the stocks in your portfolio if you take your account on margin. Continue reading...