Don’t Margin Your House Away with ETFs! - dummies

Don’t Margin Your House Away with ETFs!

By Russell Wild

It is possible to buy stocks and exchange-traded funds (ETFs) on margin. “Buying on margin” means that the brokerage house is lending you money, and charging you interest, so you can purchase securities. Ouch.

One of the often touted “advantages” of ETFs is that you can buy them on margin — something you often can’t do with mutual funds. Margin buying is very dangerous business. The fact that you can buy an ETF on margin is not always an advantage.

The stock market is risky enough. Don’t ever compound that risk by borrowing money to invest. You may wind up losing not only your nest egg but also your home.

Two things about margin you should know:

  • The brokerage house can usually change the rate of interest you’re paying without notice.

  • If your investments dip below a certain percentage of your margin loan, the brokerage house can sell your stocks and bonds right from under you.

It can be dangerous business. Margin only with great caution.

You’re also asked questions about beneficiaries and titling (or registration), such as whether you want your joint account set up with rights of survivorship. Be certain that who you name as your beneficiary is who you want to receive your money if you die.

Beneficiary designations supersede your will. In other words, if your will says that all your ETFs go to your spouse, and your beneficiary designation on your account names someone else, your spouse loses; all the ETFs in your account will go to someone else.

Finally, you’re asked all kinds of personal questions about your employment, your wealth, and your risk tolerance. Don’t sweat them! Federal securities regulations require brokerage houses to know something about their clients.