Lending you an umbrella when it’s sunny… and demanding it back when it rains.
Cranbourne’s Financial Planner Bruce Chisholm, sheds some light on margin loans – the risks and the benefits.
I have had a few queries of late about margin loans, where you borrow to invest in shares with the loan secured against the shares. These were very popular before the GFC when share markets were booming. I guess the good performance in Australian shares over 2016 & 2017 has caused a renewal of interest in this strategy.
Remember gearing (borrowing to invest) acts as a magnifying glass – it can dramatically increase the profit as well as the loss. For instance, if you gear into shares borrowing half and putting in half, then a 10% increase in value results in a return on your equity of 20%. Equally a fall in value by 10% would cause a 20% loss on equity.
A problem with margin lending is that if the market falls, the bank can make a margin call and ask you to provide additional security in a very short time frame such as 24 to 72 hours – this can be by depositing cash or providing other shares as additional security.
If you can’t meet your margin call, the bank will likely start to sell down your portfolio. The problem in a falling market is this can create a vicious downwards spiral and you can end up with no investment and still owing the bank money. I liken this to the bank lending you an umbrella when sunny, and demanding it back when it rains!
If you are interested in finding out how best to invest in shares, please call me at our Cranbourne office: (03) 5990 1000 or email bruce@highview.com.au
Article written by Bruce Chisholm, Financial Planner
Highview Accounting & Financial – Cranbourne
Authorised Representative No. 1235025 of InterPrac Financial Planning Pty Ltd Licence No. 246638
Highview Wealth Solutions Pty Ltd Trading as Highview Accounting & Financial
Bruce has written his article for general information purposes only and it does not constitute personal advice. This information has been prepared without considering any individual’s objectives, financial situation or needs. You should not act solely on the basis of material contained in this article. We recommend that formal advice is sought which considers all your individual objectives and needs.