# Marginal loan or Investment loan?



## kerosam (8 July 2006)

I am thinking about borrowing some money from the bank to buy shares. Then i remember there's an option to apply for a marginal loan where i don't have to fork out the full amount of capital. With the marginal loan, I'm up for a margin call if the value of the shares drop 20% and with the investment loan, I'm up for interest on the capital i borrow (is it rue I can claim interest on the latter loan as well?). Besides that, are there any other benefits applying either? And anyone gone thru a similar situation?

thanks in advance.


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## blinkybill (9 July 2006)

a margin loan is a form of gearing so it depends on how you manage the risks in margin loans. i don't like them personally cos of the risk of margin calls. i like equity loans much better, less risky and usually lower interest rates as well   a geared investment can greatly magnify profits but it can also greatly magnify losses if the investment goes pear shaped and you can't or don't get out early.


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## tech/a (9 July 2006)

You'll need to put up the initial margin with cash.

If you borrow it then the borrowings will be leveraged by the margin.
Risky business!

If you cannot return more than your interest and trading costs then borrowing to buy stock in my view isnt a great idea.You'll need to have a proven methodology.

I use margin and used drawdown facilities (Well did initially) to cash the lender,difference for me maybe that was only using a small portion of available equity.

As for tax implications have a chat to a tax accountant.
Costs and losses can only be claimed back against profit.
If you never make a profit then you cannot claim costs.---as I understand it.


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## NettAssets (9 July 2006)

Hi Kerosan,

You really have to get your investment or trading priorities worked out first in order to make the decision. 

Many personal or investment loans may not be suitable if you want to use the shares for collateral and want to actively trade. The bank is not going to be happy if you sell the shares that they are holding as security unless the loan is designed with this in mind.

With a Margin loan this is what the loan is designed for and is planned into it. 
It is not true in all cases that you will get a Margin call if the shares fall 20%.
It is probably not a good idea for a start to borrow more than 50% of the value of the shares as Margin which makes it most unlikely to ever get a margin call - but HIH's do happen!
You will likely be paying an interest rate penalty  for a Margin loan but it is only on what you have borrowed from day to day.
As Tech said it is probably not a good idea to buy shares with a personal or drawdown loan and then margin against them, the leverage risk is too high if things go pear shape.
I think Tech used the term profit where he should have used income in his post - get your own personal advice but as he and I understand it you cannot claim interest and borrowing costs for investments against income from other sources (like wages income for example) but any income from your investments is offset by the costs before it is classed as taxable income. By the way these costs may includes things like subscriptions to share magazines and software etc as well as interest and brokerage. Any losses can be carried forward to later years but it is easier if it is noted that a loss occurred even if you cannot claim it straight away otherwise you have to lodge an ammended return for a past year ....... You really do need to get advice on this - 
Regards
John


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## NettAssets (9 July 2006)

blinkybill said:
			
		

> a margin loan is a form of gearing so it depends on how you manage the risks in margin loans. i don't like them personally cos of the risk of margin calls. i like equity loans much better, less risky and usually lower interest rates as well   a geared investment can greatly magnify profits but it can also greatly magnify losses if the investment goes pear shaped and you can't or don't get out early.




Any form of borrowing to purchase assets is gearing doesn't matter if it is margin, equity or any other way.
John


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## kerosam (10 July 2006)

thanks guys...

i should elaborate more... i intend to buy some blue chip shares e.g. BHP and MBL... not buying them straight away... but thought i should be getting the captial set before buying in.

i have the impression that as long as i borrow capital from the bank, all cost is next deductible, be it marginal or investment loan... true?


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## tech/a (11 July 2006)

No--only if you make a profit.
If you have a nett loss from trading that year you cannot deduct expense from other income sources.


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## markrmau (11 July 2006)

As T/A says, capital losses are only able to be offset against capital gain - you can't use a capital loss as a deduction from your normal income.

However, interest payments ARE a valid deduction from any income source, including your normal job income (see an accountant for formal advice).

I think people in this situation should also consider using warrants (investment series, not trading series). Interest rates competitive - say 7-8%p.a. Interest is also deductible - my understanding is that you will be sent a statement from the warrent issuer. You will never get a margin call.


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## tech/a (11 July 2006)

tech/a said:
			
		

> No--only if you make a profit.
> If you have a nett loss from trading that year you cannot deduct expense from other income sources.





Sorry I did it again.---read No--only if you make an *income*


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## RodC (11 July 2006)

That's correct, the warrant issuer will send a statement after the end of the financial year detailing interest etc.


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## RodC (11 July 2006)

I'm puzzled by this fear of margin calls.

Provided you purchase reasonable quality shares, diversify a little and don't over gear then the risk of getting a margin call is minimal.

A margin call just means you need to sell some shares to get the loan back "in balance". If you're getting close to a margin call then you're probably also getting some "sell signals" for some of your holdings.

Rod.


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## rozella (11 July 2006)

I agree Rod, if you are receiving margin calls then you are obviously allowing losses to run.

As to margin loan v investment loan.  An investment loan usually requires some security.....why jeapodise an unrelated type of security ?  Why isn't the new investment worthy of standing on its own ?  If you don't have faith in the new investment, why would you purchase it ?

I personally believe that margin loans fit my strategy & keep me in check with reality.  However, there is nothing wrong with a small investment loan to kickstart a margin loan, provided that you have a proven strategy.....that goes for borrowing of any type.....I'm sure that this has been mentioned many times on this thread.


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## zzkazu (11 July 2006)

Having just been to the accountant you can claim losses over other sources of income if you are classed as a trader versus investor..

flip side is you dont get the 50% CGT option..

zzkazu


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## Bodhi2500 (11 July 2006)

zzkazu said:
			
		

> Having just been to the accountant you can claim losses over other sources of income if you are classed as a trader versus investor..
> 
> flip side is you dont get the 50% CGT option..





Could someone please explain that exact criteria that needs to be fulfilled to be classed as a trader.

thanks
Bodhi


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## rozella (11 July 2006)

This is a start Bodhi2500,

Carrying on a business of share trading 

The difference between a ‘share trader’ and a ‘share holder’


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## Bodhi2500 (12 July 2006)

Hi

Thanks Rosella for the links. An additional question, how does one go about becoming recognised as someone conducting trading as a business? Is it a matter of applying directly to the ATO?

thanks
Bodhi


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## rozella (12 July 2006)

G'day Bodhi2500,

It is self assessment like most things these days.....but don't be wrong, however you can always request a private ruling.  I believe there are forms for this.

If you are carrying on the business of trading stocks for profit continuously, then there is no argument.  In other words if you keep good records & are running trading as a business & conform with the guidelines in those links, then you should have nothing to worry about.  Your accountant maybe able to help you with your decision, but it will be obvious if you are a trader or not.

If still in doubt, you can always write to the ATO asking for a "Request for Interpretive Advice"  this way a senior person will reply other than somebody that just happens to answer the phone.  They will tack a disclaimer on the end of the letter.....similar as follows.


> This advice is general in nature and is not binding on the commissioner.  However,you are assured that:
> 
> If you rely on this advice and, in doing so you make an honest mistake, we will not charge you a penalty, although we may ask you to pay interest on any underpaid tax.
> 
> ...



I have been classed as a trader for the last 9 years & so is my wife, however, we also have a company classed as a shareholder & also our own superfund as a shareholder......this combination works quite well for us.


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## mit (12 July 2006)

rozella said:
			
		

> I agree Rod, if you are receiving margin calls then you are obviously allowing losses to run.
> 
> As to margin loan v investment loan.  An investment loan usually requires some security.....why jeapodise an unrelated type of security ?  Why isn't the new investment worthy of standing on its own ?  If you don't have faith in the new investment, why would you purchase it ?
> 
> I personally believe that margin loans fit my strategy & keep me in check with reality.  However, there is nothing wrong with a small investment loan to kickstart a margin loan, provided that you have a proven strategy.....that goes for borrowing of any type.....I'm sure that this has been mentioned many times on this thread.




I was quite shy of the margin I was using  but I found the same. Ruthlessly following stops you can margin close to the limit. I went through May without a problem with Margin.

MIT


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## Bodhi2500 (13 July 2006)

Heya Rozella,

Thanks for your very helpful reply.

Bodhi 




			
				rozella said:
			
		

> It is self assessment like most things these days.....but don't be wrong, however you can always request a private ruling.  I believe there are forms for this.
> 
> If you are carrying on the business of trading stocks for profit continuously, then there is no argument.  In other words if you keep good records & are running trading as a business & conform with the guidelines in those links, then you should have nothing to worry about.  Your accountant maybe able to help you with your decision, but it will be obvious if you are a trader or not.
> 
> If still in doubt, you can always write to the ATO asking for a "Request for Interpretive Advice"  this way a senior person will reply other than somebody that just happens to answer the phone.


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## Judd (13 July 2006)

kerosam said:
			
		

> I am thinking about borrowing some money from the bank to buy shares. Then i remember there's an option to apply for a marginal loan where i don't have to fork out the full amount of capital. With the marginal loan, I'm up for a margin call if the value of the shares drop 20% and with the investment loan, I'm up for interest on the capital i borrow (is it rue I can claim interest on the latter loan as well?). Besides that, are there any other benefits applying either? And anyone gone thru a similar situation?
> 
> thanks in advance.




If I may, I would first of all suggest that you learn how to spell; else you may rue the day that you did not.  Second, it's a margin loan not a marginal loan.  There is a conceptual difference between the two terms which you may have overlooked.

In order to get a margin loan you usually need collateral.  That can be either cash or shares.  About $50,000 worth of either should do it.  If you do not have that, then don't bother thinking about it until you do otherwise you are hanging your family jewels over the fence asking for them to be chopped off.  However, if you wish to revive the glorious days of the castrati go for it.

I've been burnt, lost money, lost capital and all that stuff.  So I would suggest that you go for the very simple life of placing your hard earned in direct shares, eg the blue chips, ignore whether the price is going up or down, hang in there, collect the dividends and reinvest them until you have sufficient funds to offer as collateral for a margin loan and, if you get one, never, ever gear above 50%.

Of course, you will not heed a word of this as you want to get rich quick.


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