Margin lending
About Margin Lending
Margin Lending is a loan facility secured by a portfolio of shares, managed funds or cash, or a combination of these. Margin Lending gives you more flexibility than traditional geared investment strategies by providing liquidity and the opportunity for you to diversify an existing portfolio and potentially increase the rate of return on your equity .
In the same way that an investor borrows on the equity of a property, margin lending allows you to buy a significant share or managed fund portfolio with as little as a 20 per cent deposit. This deposit serves as equity which then allows you to borrow up to an agreed gearing level. A point to remember is that this gearing ratio has consequences if the share price falls.
The negative aspects consists of a margin call. When a stocks falls below a certain level, a margin call is made. Borrowers generally have 24 hours to respond, in order to restore their loan-to-valuation agreed gearing levels, sell their underlying assets or provide additional assets to top up their equity value.
Margin Loan Importance
If you have a margin loan, it is vital to understand and be aware of all the terms of your loan.
Some common survival tips are as follows:
Regularly review your ability to make interest payments in addition to any margin calls that may arise.
Monitor your underlying investment portfolio.
Do not borrow to your limit.
Understand the circumstances under which a margin call may be made.
Keep your gearing level conservative in nature ( 50 per cent or less).
Diversify your portfolio across sectors of the market.
Pay your loan interest regularly.
Reinvest all dividends/distributions to reduce the size of the loan.
In Summary Margin Lending enables you to:
- Increase your participation in the stockmarket
- Diversify an existing portfolio using additional borrowed funds
- Direct regular cash flow into a structured, yet flexible investment plan
- Release cash from an existing portfolio for other business or investment purposes
- Use existing shares to finance new acquisitions such as rights issues, new floats and instalment receipts
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