Just curious how they make a profit. . .Say I have an account with $1 million in assets, invested in a mix of 50% stocks, 50% bonds. I make one trade this year, paying a commission of $10. Is that $10 the sum total of the firm's income from my account, or are they somehow making a profit off of holding my $1 million.I know they are able to lend some of my stock holdings to folks who sell those stocks short. Any idea how much income that would be likely to bring in?And what about the bonds?I'm trying to get some sense of how much it is worth to a brokerage firm to simply hold that $1 million in assets.
At the very least, they will probably be making money loaning our your shares to the shorts, and in the lag depositing your dividends. That extra $1 mln in their accounts managed makes them more attractive to other investors, as well.Hedge
Not only that, they also make money on any other products they might sell you. Besides, although they may not be making much money off of you, there are a lot of others (I'm sure day traders are still in existence) that they are making money off of. It will all work out in the end or they will raise their rates or go out of business.JLPhttp://AllThingsFinancial.blogspot.com
Regulations only allow loaning your shares if you are using margin. If your shares are 100% paid for, even though you have a margin account, the broker isn't allowed to do that. Cash in your account is earning the broker more than he's paying you. If your account is 100% invested, is not using any margin, doesn't have any free cash, you take your dividends in cash, and you only make one trade a year--the broker isn't generating much. Of course, s/he will call you and suggest that you trade more frequently! Also, his boss probably keeps track of the total value of accounts your broker has, and a million dollar account will add some big numbers to that figure. Best wishes, Chris
Regulations only allow loaning your shares if you are using marginYep, and any (psuedo) dividends you get while the shares are on loan won't be qualified for pref tax treatment. Good reason to have a cash account. Regarding the OP's question, the $10/year account would be very rare. You'd either be putting new money in while working, or taking it out when retired. You'd also be rebalancing...all this involves transactions. Then there's the human urge to fiddle/gamble, which is sure to rack up txn costs. Nick
If your shares are 100% paid for, even though you have a margin account, the broker isn't allowed to do that.Thanks for the clarification. I had misunderstood this to be that he could loan shares from a margin account, regardless of the status of the shares.Hedge
HedgeI think you original thought was correct. A broker can borrow shares from your margin account even if you are currently using no margin in the account. I first researched the issue at the sec site a year ago? At that time you could type a question and similar questions with answers would appear. That routine is now gone.So, I did a google search just now. This article is written 2002. Maybe rules have changed, but I doubt it. Why don't you call your broker and ask the question. http://invest-faq.com/articles/trade-broker-accts.htmlabout 1/4 the way down:<<<Another key feature of the margin account agreement is the "hypothecation and re-hypothecation" clause. This clause allows the broker to lend out your securities at will. So the ability to borrow money always comes with the trade-off that the broker can lend out ("hypothecate") securities that you hold to short-sellers. Although you will pay the brokerage when you borrow money from them, the brokerage house will *not* pay you (or in fact even notify you) if they borrow your shares. This seems to be just the way things work. Also see the article elsewhere in this FAQ about short selling for more information>>>Charles Munger, VP of Berkshire Hathaway and CEO of Wesco Financial, last year at the Wesco meeting suggested that people use cash accounts. "Get your affairs in order." (He thinks financial disruptions are possible.)After seeing at the sec site what brokers could do with my margin account even though I employed no margin, I changed my account to a cash account.
Hedge,BTW, this part <<<(or in fact even notify you) if they borrow your shares.>>> I believe became a problem when "qualified" dividends were insitutued.The problem was that the dividends paid to you on your shares which were borrowed (without your knowledge) were UNqualified dividends subjecting them to the higher tax rate.Do you remember the fuss about brokerages sending out erroneous 1099s? They weren't prepared to separately identify dividends on those borrowed shares. i.e., dividends were shown as qualified when in fact they were not. Ring a bell?Previously, all dividends were taxed at the individual rate? So no problem until the qualified/UNqualifed distinction. Qualified at 15% and UNqualifed still at the individual tax rate?But, more people then became aware that brokerages were borrowing their shares.Separate issue if they can do that when you currently employ no margin. As I said, I think they can.Lethean
I don't know. But, aren't cash accounts a pain with the "free ride" issue? In a margin account, I can sell a block of xxx and buy a block of zzz without having to wait for the xxx to clear 3 days later. With cash accounts, I think you have to wait.Hedge
I believe a "free ride" is when you buy xxx and before the money reaches the brokerage for the purchase, you sell xxx. Thus, free ride.
Right, so wouldn't a same day sell x buy y be a free ride? I just know that I have a margin account, and of course I do this without worrying about it. My brokerage charged me a margin fee once, and the rep couldn't explain it, so he refunded it. But, I believe that it was a fee for the 3 day settlement period margin on y before the brokerage got their money from x. With a cash account, that would have been considered a free ride, I think.This all too technical for me. I know there is some minimal risk to margin accounts, but, like the perceived risks on ETFs, it seems fair enough to me since it allows me to conduct my account the way I want to. If I had serious long-term money in a dividend paying stock, I might consider a separate cash account for the reasons you bring up. But, I don't foresee that happening in this lifetime. :o) I'm not so sure the tax difference on $500 worth of dividends would be worth all the hassle.Hedge
Hedge<<<so wouldn't a same day sell x buy y be a free ride?>>>The sell of y has nothing to do with a "free ride". When you buy stock in a cash account you have 3 days (maybe 5) to get the money to the brokerage. Checking my last purchase in a cash account with harrisdirect, the trade date listed was 11/25/03 and the settlement date was 12/1/03. Turning that confirmation slip over, harrisdirect lists Terms and Conditions. There it states that payment in full in a cash account is due "not later" than the settlement date and that a sale of such securities not be contemplated prior to making such payment. (That's the "free ride" reference. Not allowed.) IOW, in a cash account you can't sell X stock before paying for X stock. (similar to kiting?)With a cash account, no question you have to get the check in the mail same day you make the purchase or link your brokerage account to a checking account. But dates above give adequate time, IMO.Sounds like you're satisfied with your arrangement.
<<<so wouldn't a same day sell x buy y be a free ride?>>>The sell of y has nothing to do with a "free ride". When you buy stock in a cash account you have 3 days (maybe 5) to get the money to the brokerageLike I said, this is beyond me. I haven't read the fine print.But, for example. 1. You have $3.86 in your brokerage account and 1 share of BrkA.2. You sell BrkA and immediately buy $90K worth of SPY.Is this a problem with a cash account?
The broker also makes money by selling order flow, whatever that is. Freetrade.com charges 0 commisions.
"But, for example. 1. You have $3.86 in your brokerage account and 1 share of BrkA.2. You sell BrkA and immediately buy $90K worth of SPY.Is this a problem with a cash account? " No, assuming BRK.A is trading above $90000 at the time. All IRAs are cash accounts. I've done this sort of thing several times--sell most of the assets in the account and buy something else the same day. But the broker may have rules against daytrading, and may require that before you buy a stock, sell it, and buy the same stock again on the same day, you must have enough cash in the account to cover both buys. Best wishes, Chris
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