4 ms·

Could you explain how it multiplies your risk in the case of RH?

MrMan 6y ago
Why don't you figure out how borrowing to make a trade increases your risk, and explain it to the rest of the class? Teaching will deepen the lesson for you. Luckily it is all basic arithmetic.
- barbecue_sauce 6y ago
  Wow, what a dick.
  - barbecue_sauce 6y ago
    I stand by my comment.
- ubercow13 6y ago
  But you're borrowing a fixed amount of money that has already been effectively taken from you. My understanding of RH (I am not a user) is that you are not allowed to spend above the amount that is already incoming to your account, via ACH transfer or via sold stock that hasn't yet settled. It wouldn't make sense for RH to margin call you because at any one time, whatever money they would ask for would already be incoming to your account. There would be no point in them liquidating your position because it would clear even later than the previous trades, which already cover any margin. And you can't sell options or anything. Therefore I don't understand what the risk to the customer is over and above a cash-only account. I guess there's a risk that your bank transfer won't go through, or your stock sale will be withdrawn or not settle? Is that likely?
Sophistifunk 6y ago
It's secured against assets that may not be worth tomorrow what they are today. Imagine if you stopped paying your mortgage, and the bank sells your house, but they only make 5% of what you paid for it because the price of houses in ubercow's neighbourhood happened to plummet recently. Now somebody else has your house, but you still owe the bank almost all the money.
- ubercow13 6y ago
  But the assets are always sold before you are allowed to use the funds from those sales on RH. I don't think that analogy works. In the end, if your assets plummet in value, you don't owe RH all the money because you have already paid them it, through a bank transfer or stock stale which is already completed at a known price before you could spend those funds. It's like a mortgage with a 100% deposit. You might technically owe money at some point, but you have already covered it completely. And the bank isn't going to sell your house because they know the full value of the mortgage in cash is already on the way to them.

Why don't you figure out how borrowing to make a trade increases your risk, and explain it to the rest of the class? Teaching will deepen the lesson for you. Luckily it is all basic arithmetic.

barbecue_sauce 6y ago
Wow, what a dick.
- barbecue_sauce 6y ago
  I stand by my comment.
ubercow13 6y ago
But you're borrowing a fixed amount of money that has already been effectively taken from you. My understanding of RH (I am not a user) is that you are not allowed to spend above the amount that is already incoming to your account, via ACH transfer or via sold stock that hasn't yet settled. It wouldn't make sense for RH to margin call you because at any one time, whatever money they would ask for would already be incoming to your account. There would be no point in them liquidating your position because it would clear even later than the previous trades, which already cover any margin. And you can't sell options or anything. Therefore I don't understand what the risk to the customer is over and above a cash-only account. I guess there's a risk that your bank transfer won't go through, or your stock sale will be withdrawn or not settle? Is that likely?

Sophistifunk 6y ago

It's secured against assets that may not be worth tomorrow what they are today. Imagine if you stopped paying your mortgage, and the bank sells your house, but they only make 5% of what you paid for it because the price of houses in ubercow's neighbourhood happened to plummet recently. Now somebody else has your house, but you still owe the bank almost all the money.

ubercow13 6y ago
But the assets are always sold before you are allowed to use the funds from those sales on RH. I don't think that analogy works. In the end, if your assets plummet in value, you don't owe RH all the money because you have already paid them it, through a bank transfer or stock stale which is already completed at a known price before you could spend those funds. It's like a mortgage with a 100% deposit. You might technically owe money at some point, but you have already covered it completely. And the bank isn't going to sell your house because they know the full value of the mortgage in cash is already on the way to them.