Q&A

Since You Asked

with Don Bright

Confused about some aspect of trading? Professional trader Don Bright of Bright Trading (www.stocktrading.com), an equity trading corporation, answers a few of your questions. To submit a question, post it on the Stocks & Commodities website Message-Boards. Answers will be posted there, and selected questions will appear in future issues of S&C.

ANSWERING SOME BASIC QUESTIONS
I recently opened an account with an online broker but have had a hard time getting any answers to some basic questions. I was hoping that you could help me. My questions are very basic, but I cannot get a few things straight:

The online brokers refer to marginable securities, but what does that mean for me? I was warned about the margin involved when buying a stock at about $3.00. What difference does it make?
When I asked about selling stocks short, they wanted me to read several pages of hard-to-understand information they provided. I thought selling short was like betting on a downward move. And again, there was that warning about $3.00 stock.
They told me about something called “interest differential” — and that I should be concerned about it. I don’t know what that means.
And finally, they referred to something called mark to market. I’ve heard that term as it relates to houses and stuff. Is this a tax consideration?

I hope you can help, and I think that there may be others too afraid to ask such simple questions. —Iowa57

First off, let me say that I have always been glad to answer all questions, from basics to the detailed intricacies of trading. And I agree, your questions are likely to help others:

Marginable: What they mean by “marginable” securities is simply that some stocks are eligible to be used as collateral against your margin portion of your account. For example, even for our professional traders, stocks under $5.00 must have 100% of the cash put up in their trading accounts (where we allow up to 30 times their cash equity for stocks above $5.00). The reasons vary in that some have to do with reporting requirements to the government, and so on.
Short sales: You’re right about selling short being the same as making a bet on a stock going down. The concerns are that the firm must “borrow” those shares that you are selling short. They do this from either their own inventory or from endowment funds or other institutions. They may have to pay for this, and they will likely pass those fees along to you. Other reasons for not selling short include a low-priced or a stock with low liquidity that is below $5.00 again. The risk of the stock is infinite; going down is quite limited, obviously.
Interest differential: These days, there is not much to be gained from interest differential since rates are so low. But in general, it’s the interest you receive from your cash deposit versus the amount they charge you for your stock positions. Think how a bank pays you 1% and charges you 5% for buying a car.
Mark to market: This one can be confusing. As a retail trader, you likely pay taxes based on only your purchase price plus or minus your selling price. You can check with your accountant about qualifying for trader tax status. Now, if you buy 1,000 shares at $40.00 and the stock goes down to $35.00, you have a mark to market loss of $5,000 — but no realized loss until you sell it. However, your account should reflect the mark to market numbers, so don’t get fooled into thinking you’re okay as long as you don’t sell those shares. The US got into a lot of trouble when banks did not properly value their assets based on current values, but that’s another story.

I hope this helps you, and if you or anyone wants further clarification, send me or the magazine an email.

ON OCCASION OF THE ANNIVERSARY
I want to take a portion of my column this month to congratulate Stocks & Commodities on their 30^th anniversary. Job well done to all.

I met my first S&C editor in 1999, when John Sweeney came to my office to interview my brother Bob and me (Stocks & Commodities, June 2000). I had always enjoyed the magazine, and I read its many articles relating to equities, charting, and trading tips. Back in my days on the various exchange trading floors, S&C was the one magazine that the professionals would keep around each month, while many others came and went.

Sweeney had asked if we would be willing to answer some readers’ questions, and we told him that we would be glad to. So for the last 12 years or so, I have done my best to help as many traders as possible with their questions.

Without the foresight of Jayanthi Gopalakrishnan and many others, this magazine would not have survived for 30 years! I want to thank those who work so hard to correct my errors, and to make the magazine as good as it is. Other “polished” magazines have come and gone over the years, but S&C has adapted to the ever-changing marketplace and kept up or kept ahead of the curve in the fields of technology and web publishing.

Here’s to another 30 years. Happy anniversary, Stocks & Commodities, the best trading magazine out there! — Don

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