# A few questions about margin loans!



## ChrisJH (27 April 2011)

I just spent a bit of time searching and reading old threads on margin loans, and couldn't find what I was looking for, so here goes.

I am looking at increasing my leverage and thus my capital with a margin loan, there are a few things I am unsure of, and actually speaking with the lenders didn't seem to be very helpful either,thus a few questions:

1. If I am using my current portfolio as security, how much can I borrow? Obviously no one here can tell me that, but in my margin loan applications I need to put down how much I would *like* to borrow, and all the lenders could tell me was that I should put down what I want and they will either approve or not approve me.

Let's say my current portfolio was worth 50k; if I used that as security would that suggest I could have a margin loan of perhaps half that? Equal that? Double that? Obviously income plays a part as well.

2. If I purchase shares with my margin loan, and then wish to sell them for a capital gain; how does that gain affect my loan? Can I take it out and do what I want with it? (Not that I would want to... what I would want to do would be to compound that with the other amount and buy shares in a different company).

3. If I were to have, say, a margin loan of 50k, and used only 25k of it; if the value of the stock I owned went down, it would have to go down significantly (ie: more than the 50% of the loan I wasn't using) before getting a margin call?

4. If the margin loan is secured against the value of my current portfolio, can I still buy and sell the shares I already owned with ease? And how would this affect my margin loan?

5. Am I only able to purchase stock with the margin loan that are on that lenders list of approved stocks? I think I read in one thread (can't find it now) where someone was saying that you can use it to purchase any stock, just that if it's one that is not on the list that you can't get extra leverage out of it... or something?

Cheers & Thanks!


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## Country Lad (28 April 2011)

ChrisJH said:


> I just spent a bit of time searching and reading old threads.......




Trading on margin is an excellent way for leverage, I have been using it for decades.  However, in light of your questions, I suspect that you need to do a lot more research to fully understand both how it works and the risks. 



> ....... and actually speaking with the lenders didn't seem to be very helpful ..........




That lender is obviously one you do not use if he can't be helpful from the start.  I am not trying to be difficult, but could it be you are not asking the right questions of the lender?



> 1. If I am using my current portfolio as security, how much can I borrow?




Depends on the shares you hold in your portfolio or what other security you put up.  Can't help you with the second one but your lender will have a list of the LVRs for the shares you are using for security similar to  this one  for the calculation of the loan amount.



> 2. If I purchase shares with my margin loan, and then wish to sell them for a capital gain; how does that gain affect my loan? Can I take it out and do what I want with it?




Yes, (keep in mind the tax on profits) and as long as it does not reduce the overall LVR of your account to the point it no longer covers your margin.



> 3. If I were to have, say, a margin loan of 50k, and used only 25k of it; if the value of the stock I owned went down, it would have to go down significantly (ie: more than the 50% of the loan I wasn't using) before getting a margin call?




Depends on the LVRs of the shares you are holding. The   FAQs here  may help understand this.  Anybody managing their portfolio effectively will never have a margin call because they will have already sold the shares falling too far in price.  My view is that anybody subject to margin calls should not have a margin account or maybe shouldn't be trading shares.



> 4. If the margin loan is secured against the value of my current portfolio, can I still buy and sell the shares I already owned with ease? And how would this affect my margin loan?




Again, this can be calculated from the LVRs of the securities you hold - and should be done so consistently so that you know exactly where your margin account stands at all times.  This can be done by a simple spreadsheet.  Whether it is with ease or not depends on whether the trading platform you use has a seamless system with the margin lending or the margin lender.



> 5. Am I only able to purchase stock with the margin loan that are on that lenders list of approved stocks? I think I read in one thread (can't find it now) where someone was saying that you can use it to purchase any stock, just that if it's one that is not on the list that you can't get extra leverage out of it... or something?




You can buy any share you like in your margin account but too many of the ones not on the acceptable securities list can go a long way to negating the benefit of a margin loan.


Chris, I would suggest you do a lot more research so that you fully understand margin lending and this requires a lot more work than asking questions on forums.  There are numerous articles you can find on the internet.  I have attached one such article.

Cheers
CL


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## Logique (28 April 2011)

ChrisJH,
open up a loan and initially keep your loan to valuation ratio (LVR) to 25% or less, it's hard to be caught out from there. You'll soon get the hang of it.  Also see my worked example on the following thread.  'Margin Loan Reduction': https://www.aussiestockforums.com/forums/showthread.php?t=22046&highlight=Margin+Loan
Cheers, L.


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## Liar's Poker (28 April 2011)

Logique said:


> ChrisJH,
> open up a loan and initially keep your loan to valuation ratio (LVR) to 25% or less, it's hard to be caught out from there. You'll soon get the hang of it.  Also see my worked example on the following thread.  'Margin Loan Reduction': https://www.aussiestockforums.com/forums/showthread.php?t=22046&highlight=Margin+Loan
> Cheers, L.




Good posts by both CL and Logique.

I agree with keeping your LVR to 25% or less, especially when starting out using a margin loan. Like Logique states, it's much harder to get a margin call (caught out) from a low LVR. Additionally, you will start to get a feel for how share price movements of shares you are leveraging against effect your LVR.

Diversification through correlation becomes all the more important when you are using your portfolio as security.

-Liar-


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## ChrisJH (28 April 2011)

Thanks all for the replies!



Country Lad said:


> Trading on margin is an excellent way for leverage, I have been using it for decades.  However, in light of your questions, I suspect that you need to do a lot more research to fully understand both how it works and the risks.




Thanks Country Lad for replying to all my points, it is much appreciated. You are absolutely right in that I need to do more research with regards to margin loans. There are a few key points I don't fully understand, hence my questions here, but I do believe I am at a stage where the amounts I have to invest aren't big enough to help me achieve my long term goals and thus looking into things like margin loans to see how I can improve my financial situation.



Country Lad said:


> That lender is obviously one you do not use if he can't be helpful from the start.  I am not trying to be difficult, but could it be you are not asking the right questions of the lender?




It certainly could be the case, but when I'm told to "just apply" and I will either be approved or not approved then that to me doesn't imply that they are too keen on being helpful. 



Country Lad said:


> Depends on the shares you hold in your portfolio or what other security you put up.  Can't help you with the second one but your lender will have a list of the LVRs for the shares you are using for security similar to  this one  for the calculation of the loan amount.




Hm, thanks!



Country Lad said:


> Depends on the LVRs of the shares you are holding. The   FAQs here  may help understand this.  Anybody managing their portfolio effectively will never have a margin call because they will have already sold the shares falling too far in price.  My view is that anybody subject to margin calls should not have a margin account or maybe shouldn't be trading shares.




See, I think this is the main thing I am wondering about. I guess I am trying to find out whether a margin loan will give me the same flexibility that using my own money does. In certain situations I am not necessarily averse to the share price of a stock going down quite a bit if I am confident that the share price will rise back to a comfortable level, obviously I wouldn't want to be in a situation where instead I had to sell some of a stock at that lowered price.

From the understanding I am gathering, though, the most sensible thing to do with a margin loan would be to simply not borrow anywhere near as much as the maximum I can borrow. 



Country Lad said:


> Chris, I would suggest you do a lot more research so that you fully understand margin lending and this requires a lot more work than asking questions on forums.  There are numerous articles you can find on the internet.  I have attached one such article.
> 
> Cheers
> CL




Thanks Country Lad, I appreciate your time and suggestions. I will definitely be investigating this as much as I can before I jump in and start borrowing. While I do want to jump in and have some more money to invest as soon as I can, I realise there isn't much point doing that if I am just going to lose it all 



Logique said:


> ChrisJH,
> open up a loan and initially keep your loan to valuation ratio (LVR) to 25% or less, it's hard to be caught out from there. You'll soon get the hang of it.  Also see my worked example on the following thread.  'Margin Loan Reduction': https://www.aussiestockforums.com/forums/showthread.php?t=22046&highlight=Margin+Loan
> Cheers, L.






Liar's Poker said:


> Good posts by both CL and Logique.
> 
> I agree with keeping your LVR to 25% or less, especially when starting out using a margin loan. Like Logique states, it's much harder to get a margin call (caught out) from a low LVR. Additionally, you will start to get a feel for how share price movements of shares you are leveraging against effect your LVR.
> 
> ...




Thank you Liar and Logique. I did have a look through that other thread previously, I will check it out again. I will definitely be keeping my LVR low to begin with, once I have a margin loan, so I can use it and gain experience with it. I think the main thing I am trying to do is to wrap my head around how LVR and everything works. I think there's a few finer workings I will grasp much better once I start actually doing it.


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## Tyler Durden (29 April 2011)

I don't know anything about margin loans, but from what little I understand of it, isn't it kinda like asking the bank to borrow some money, taking it to the casino and hoping you'd win and then return the borrowed amount?


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## Sugar Dunkaton (25 May 2011)

Tyler Durden said:


> I don't know anything about margin loans, but from what little I understand of it, isn't it kinda like asking the bank to borrow some money, taking it to the casino and hoping you'd win and then return the borrowed amount?




That is probably what the media would like you to believe ala Storm/Opes Prime.

However, Margin Lending can often be used as a very successful investment strategy for lots of people in different situations ie.

- large stock portfolio but need cash and dont want to sell your shares - a margin loan will allow the customer to draw down against the security they lodge in their margin loan. Giving them the cash that they need.

- concentrated portfolio? Only have a few shares/sectors in your equity portfolio - can use a margin loan to diversify and buy different shares/shares in different sectors.

- tax effective - interest is usually tax deductible (i am not an accountant so best see your own).

- portfolio building - gives the user access to more capital for them to grow their portfolio, faster than what they may be able to without a ML.

As with most investment products, there is of course risk. And as a geared product the risk is increased.

But your statement is a shallow view blaming a *product *for the decline in a persons wealth, rather than bad investment decisions/strategy by the user.

As with all investments, its important to do your own research, develop your strategy, trade within the guidelines of your strategy and risk tolerance etc etc.


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