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> It seems like a win-win. It's not a win-win, there's significant risk. > fully collateralized This is not true! The underlying asset fluctuates in value an
by iooi 5y ago
> It seems like a win-win.
It's not a win-win, there's significant risk.
> fully collateralized
This is not true! The underlying asset fluctuates in value and is open to lowering significantly in value, leaving the bank holding the bag.
- ac29 5y ago> leaving the bank holding the bag You probably underestimate the ability of banks to evaluate risk. Yes, they absolutely could end up underwater on an asset backed loan, but you also shouldn't assume that you can take out $1 in loans on every $1 of stock. On Schwab's page, they say: "Schwab Bank, in its sole discretion, will determine what collateral is eligible collateral and the loan value of collateral". So, if you have some recently highly-appreciated shares of AMC for example, they might decide they are not eligible collateral, or only offer to lend you $1 for every $5 of stock.
- influx 5y agoLOL, yeah the banks have been so great at leverage in the past couple of decades in the USA that they have to get bailed out repeatedly.
- AdamN 5y agoDepends on what you spend the money on. If you take the margin and spend it on an asset, then you have the underlying stock as well as the asset to cover calls. Still requires correct thinking but the risk is mostly based on what you do with the loan.