# Question on margin lending



## kitehigh (17 March 2006)

Hi All,

This is my first post and I have done a quick search but didn't really find what I was after.
I have a couple of questions on margin lending.

In regards to the GR (gearing ratio ) that you see advertised by banks, does this mean how much they are will to loan against that particular stock.

eg. WPL gr 75%, does that mean I can put in $15 and the lender will put in an additional $75 giving me a $100 investment. ??

Also if I did gear to the full amount eg 75%, does that mean as soon as the share price drops below what I initial paid for them I get a margin call???

I have owned shares for a no of years but have never used gearing mainly because I didn't understand it, and have only woken up to the fact that its the leavaging that creates the wealth, and thats why people have done so well out of property because the banks are willing to lend heavily on this investment. 
 I do understand the risks with leavaging as well, as it not only magnifies your increases, it will magnifiy your losses as well if the market turns against you.

Thanks is advance.

Andrew


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## rozella (17 March 2006)

G'day Andrew,



> eg. WPL gr 75%, does that mean I can put in $15 and the lender will put in an additional $75 giving me a $100 investment. ??



Your maths are a bit out there, but if the marginlender will give 75% on WPL, your portion will be 25%



> Also if I did gear to the full amount eg 75%, does that mean as soon as the share price drops below what I initial paid for them I get a margin call???



No, thats wrong.  At that point you have no more credit left to buy more stocks.  Each marginlender has a buffer, usually between 5% & 10% of portfolio beyond the ratio before you will receive a margin call.

Here are a couple of marginlender sites to look at:
Leveraged Equities
BT Equities


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## tech/a (17 March 2006)

I've been trading margin for years.
Think also that say you have a 40% Stock you cannot hold more than 40% of your portfolio value with that stock.
Never been a problem for me as my portfolio's are 8-12 stocks.

Worth mentioning also that if you have say $20K in cash deposit interest isnt charged until you use any of the lenders money and its only for the duration of that % of lenders money is used. Unlike a loan that is fully drawn and charged.


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## kitehigh (17 March 2006)

Thanks guys,

Yep my mistake on the maths, maybe I should have been an accountant with Enron.  

Another question for those of you who do use margin lending.  Do you use the fixed interest option and pay your interest in advance or do you go with the variable rate??

Cheers
Andrew


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## tech/a (17 March 2006)

Me variable.


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## rozella (17 March 2006)

I use the variable, with brokerage & interest capitalised to the loan.

Some marginlenders have a lower LVR for various single holdings.  BT is one.

It is difficult to operate a margin loan with one stock if you utilise all the credit, as tech/a says, he uses 8-12, I use similar....best for me is 10-15.  You must keep within the total average LVR of your portfolio, not on each single stock separately.


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## 123enen (17 March 2006)

Some lenders also give you the option near the end of the tax year to pre pay some interest for next year's borrowings. 
That is you can pre pay the interest on an agreed amount and claim that interest on this years tax - not the year that you actually borrow the money. 

I do it if my tax position calls for it but generally there is no benefit.

If you do this you need to be borrowing that whole amount of agreed money for the full year - because there is no refund. You have paid the interest and that's it. Use it or lose it.

For example, if you were concerned about the stock market now and decided to close out your portfolio and sell your shares, any interest you may have pre paid is not refunded.


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## Smurf1976 (17 March 2006)

Just remember that the 75% etc limit is a MAXIMUM and not a recommended gearing level.


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## Fleeta (17 March 2006)

I used margin lending with success in 2003/2004 as it magnifies your gains, on the bad side it also magnifies your losses and I would never have bought as much ION stock as I did if BT wasn't giving 60% LVR on it...so be careful, just because the margin lender will let you borrow to buy doesn't mean it is a healthy share!

I'm out of margin lending now as I have a home loan and am becoming slightly more risk averse.


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## BSD (17 March 2006)

Get some professional advice or you will blow yourself up. 

Any idiot can make money leveraged into a bull market. 

But mix a bear market, a gearing ratio above 50% and a lack of free cash and you have a person about to disappear up their own backdoor. 

If you get a margin call and have no $$$ you are selling into a falling market.


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## rozella (18 March 2006)

G'day Andrew,



> I do understand the risks with leavaging as well, as it not only magnifies your increases, it will magnifiy your losses as well if the market turns against you.



Yes, thats right, so the no.1 step is to have a consistantly winning strategy, otherwise you will be digging your hole much quicker.

On the positive side, once that the no.1 step has been achieved, marginlending can be a very good tool.

I can't agree with  BSD's comments, unless it is in the hands of a novice, but if trading is your profession, then you will have risk procedures in place.  Marginlending teaches you to become a disciplined trader, & yes I agree that


> Any idiot can make money leveraged into a bull market.



Well most anyway.


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## tech/a (18 March 2006)

rozella said:
			
		

> G'day Andrew,
> 
> 
> Yes, thats right, so the no.1 step is to have a consistantly winning strategy, otherwise you will be digging your hole much quicker.
> ...




Cant agree more Don. BSD's warning is one that should be heeded by undercapitalised traders and in particular those drawn to the 10x CFD leverage available.



> As for any idiot can make money in a bull market



--so he should if he is trading long then thats why he is in the market---to take advantage of bull runs.

*Question*---Is then a good trader in a bullmarket one that can make profit going Short?
OR
In a Bear Market one who can make a profit going long?


Personally I believe anyone who can take advantage of a Bullmarket,Property booms,Business opportunity,is a pretty happy idiot.

The *complete* idiots are however those who judge the idiots and do bugger all smuggly content that they are "not at risk" when the crash comes---which they can see very clearly---funny how they couldnt recognise opportunity and take advantage of it isnt it.


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## BSD (18 March 2006)

I dont have a problem with margin loans. But if you can't understand an LVR you need advice. 

Often people with no idea load their small stake using a 60% geared margin loan into a fallen angel (it'll come back) or a raging bull market dream (VCR at $1.50+). 

They are nor 'traders', they are not nimble, they don't watch the market all day and have no broker. 

The stocks fall a lot and/or have their LVR reduced and they turn their stake into 20% of what it was. 

How many people do you reckon geared up to buy TLS at $4.50 ?



			
				tech/a said:
			
		

> *Question*---Is then a good trader in a bullmarket one that can make profit going Short?
> OR
> In a Bear Market one who can make a profit going long?
> 
> ...




The idiot/bull market comment is more of a reference to the expectation many have in this market of gearing=good. Risk management, in my view, is what investing is all about - not leveraging-up and spinning the wheel. 

Gearing is fine as long as you are nimble, LIQUID and can afford to see a decent sized hole blown in your stack. 

A good trader, in my view, is one who achieves his own goals and doesn't risk blowing up. 

I am not a doomsayer and are leveraged a little (20%). 

I do however manage my risk levels through constantly adjusting my gearing and ensuring diversity in asset allocation/strategies.


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## tech/a (18 March 2006)

Agree.

However discretionary traders have a misguided veiw of Risk management blindly following Fixed Fractional position sizing (generally) with no idea of their Win/Loss Ratios and no concept of Reward/Risk ratios let alone having a benchmark.Throw in unknown initial drawdown,and maximum run of losses,all without a blueprint to benchmark against and all the Money Management in the world will simply slow down the leak.

M/M alone will not guarentee a consistant profit.


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## wayneL (18 March 2006)

tech/a said:
			
		

> Agree.
> 
> However discretionary traders have a misguided veiw of Risk management blindly following Fixed Fractional position sizing (generally) with no idea of their Win/Loss Ratios and no concept of Reward/Risk ratios let alone having a benchmark.Throw in unknown initial drawdown,and maximum run of losses,all without a blueprint to benchmark against and all the Money Management in the world will simply slow down the leak.
> 
> M/M alone will not guarentee a consistant profit.




Tech, 

These comments re discretionary trading are as narrow minded as Ducs views. Discretionary doesn't mean undisiplined just as mechanical doesn't necessarily mean disiplined. 

I will use the example of Nick. He may have his mech systems, but a lot of what I see him talk about is rule based discretionary. And I wouldn't go about accusing Nick of being misguided.

Also, a mechanical system doesn't do those things in the short term either. If you take the next twenty mechanical signals, you will have no idea what your drawdown, win/loss or risk/reward ratios will be.

Perhaps some mech traders have the misguided view brought on by a rampant bull?

Maybe you should alter your premise to be about "undisiplined" traders rather than use the word discretionary.

Cheers


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## tech/a (18 March 2006)

wayneL said:
			
		

> Tech,
> 
> These comments re discretionary trading are as narrow minded as Ducs views. Discretionary doesn't mean undisiplined just as mechanical doesn't necessarily mean disiplined.




You can blindly follow a discipline, to find in the end it leads to a false premise. Being both Discretionary AND undisciplined is far worse I agree.
Narrow minded--no I think more like hitting a raw nerve in most traders.



> I will use the example of Nick. He may have his mech systems, but a lot of what I see him talk about is rule based discretionary. And I wouldn't go about accusing Nick of being misguided.




I would be very suprised if Nick didnt have numbers on his short term Elliot.
If he could not prove positive expectancy with numbers he felt comfortable with he wouldnt trade it let alone risk his reputation and livelyhood on it.



> Also, a mechanical system doesn't do those things in the short term either. If you take the next twenty mechanical signals, you will have no idea what your drawdown, win/loss or risk/reward ratios will be.




True but what you will know is what it *SHOULDNT BE*. Even if I'm trading Disiplined Discretionary *I DONT KNOW* what it should be. Now thats dangerous.



> Perhaps some mech traders have the misguided view brought on by a rampant bull?




If mechanical traders cannot make a consistant profit out of the LONG method they have designed to trade in bullish conditions then they aren't much of a trader period. (In fact they wouldnt know a profitable blueprint if it ran over them)



> Maybe you should alter your premise to be about "undisiplined" traders rather than use the word discretionary.




No even with a Disciplined Discretionary method they have absolutely no idea whether they have a profitable method.
Even if they fluke it they should know when their method falls outside the "Known" parameters (From past trades) to ring alarm bells. Disciplined Discretionary traders are trading blindly. Undisciplined Descretionary traders are trading wrecklessly.

I could make up any number of discretionary trading plans based upon the soundest of thinking and follow it to the letter and still be a net failure.
Now how would that be if it took 3 wasted years to find out.
If I have a sound mechanical method and it trades outside its blueprint I can cease NOW, because I KNOW its outside its parameters on which its positive expectancy is based. No guessing,hoping,hypothesising,its there in black and white.
If I have a Disciplined Discretionary method and have 12 losses straight how do I know that this is Fine or worse Disasterous?
Do I follow my discipline? Would I have ever tolerated 12 losses in the first place?---there is nothing to benchmark discipline against---its *BLIND* discipline.


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## wayneL (18 March 2006)

Tech, I will respond in more detail later as I have people to see over the weekend, but I just had to take this to task:



> No even with a Disciplined Discretionary method they have absolutely no idea whether they have a profitable method.




Absolute pure BS. I can use an adding machine too and numbers are numbers. You make the fatal asssumption that because you failed at discretionary trading then it can't work. 

Sorry, it can, and does... even when daytradng (another sacred cow of the "it can't be done" brigade)

...later


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## bullmarket (18 March 2006)

An alternative to a margin loan is an equity loan.  Obviously you need equity in an asset to qualify but if you do then an equity loan might be more practical for gearing investments than taking out a margin loan facility.

Years ago the Bank of Melbourne (now taken over by Westpac) had a fantastic product - Asset Builder Loans.

Basically, if you had equity in your home or other suitable asset you could take out a mortgage against that equity to fund other investments. I certainly wouldn't advise taking out an asset builder loan to blow on a new boat, car overseas holiday etc etc 

At the time there were no ongoing fees at all (apart from the account establishing fee and one or two other small startup 'handling' fees from memory) - no interest at all is charged unless you actually drew down on the loan and the only monthly payments required were the interest charges for that month on any draw down.  So if your closing balance on the loan was $0 then you have all that credit available *at no charge* until you drew down the loan .  You could also repay whatever portion you liked of any drawn down amount whenever you liked and interest was calculated daily.  There were no margin calls or anything like that if your investment went south.

Now whether Westpac still offer this product nowadays to new customers I have no idea but I'm sure Westpac and the other banks will have a similar product available today.  So imo, if you have equity in a suitable asset then maybe consider taking out an equity type loan instead of a margin loan.

cheers

bullmarket


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## tech/a (18 March 2006)

wayneL said:
			
		

> Tech, I will respond in more detail later as I have people to see over the weekend, but I just had to take this to task:
> 
> 
> 
> ...




Ofcourse you can trade in a discretionary manner and have winning trades.
Even a string of winning trades.

I had some great wins trading in a discretionary manner.
When I initially started trading I couldnt get the consistancy I wanted from disc trading and thats the biggest complaint I hear today from Disc traders.
Would I trade 100s of 1000s in a discretionary manner or my super or leveraged---no way.

There are traders who succeed for long periods as disc traders and day traders infact Radge said that the most profitable trader he had on his books when broking was a Disc trader---BUT his drawdowns were wild. Dont know if he blew up.

If saftey and consistancy is what a trader wants then I can guarentee that if he developes a Mechanical trading method and it is rigorously tested to return a "Blueprint" of numbers with a sound positive expectancy and he trades that method within those numbers returned within the method then he will be longterm profitable.

I'm interested Wayne if you believe that given any set of discretionary rules you can guarentee the same,and how?

Oh and its now called a line of credit Bull.
Some do both,line of credit AND margin.
I know the risk,no different than using equity in your home to buy more homes.


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## crackaton (18 March 2006)

tech/a said:
			
		

> I've been trading margin for years.
> Think also that say you have a 40% Stock you cannot hold more than 40% of your portfolio value with that stock.
> Never been a problem for me as my portfolio's are 8-12 stocks.
> 
> Worth mentioning also that if you have say $20K in cash deposit interest isnt charged until you use any of the lenders money and its only for the duration of that % of lenders money is used. Unlike a loan that is fully drawn and charged.




So say I have one of these comsec accounts with 20K in it, then interest won't be charged?


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## bullmarket (18 March 2006)

no problem tech/a 

To me you're just coming across as being upset because someone else also thinks you're posting BS 

I'm sure the vast majority know it's a line of credit. I was just pointing out some obvious advantages of an equity loan as opposed to a margin loan for anyone that it might have slipped through their minds.  I wasn't referring to you in particular.

I'll just keep watching your posts with amusement as I said in other threads.

Good luck in your endeavours and have a pleasant evening and remainder of the weekend 

cheers

bullmarket


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## crackaton (18 March 2006)

Guys seriuous question here. I have some cash in an account and I want to minimise my tax. The only way I know is to negative gear but I want to do this with shares. Is this possible? Any thoughts?


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## rozella (18 March 2006)

G'day bullmarket,



> An alternative to a margin loan is an equity loan. Obviously you need equity in an asset to qualify but if you do then an equity loan might be more practical for gearing investments than taking out a margin loan facility.



Each to their own I suppose, but my opinion is that with a margin loan you are trading/investing with a product that is using the security of the investment that you are purchasing, not some other unrelated asset.  As we all know, that by using a margin loan, we must stay within certain ratios, otherwise we may have a margin call.....but is this not good.....someone is saying "hey, you are not doing your job, you have let your stocks fall below your stoploss, what are you going to do about it"  We have the two greatest examples of all, TLS & AMP.......would we still have the original holdings if we bought on margin.....unlikely......but it is possible that we may still hold if bought with an equity loan.  I keep saying it, but marginlending teaches discipline.....if you don't keep your portfolio tidy, then big brother asks you nicely to do so.

A margin loan is revolving credit, basically with no limit, you don't need to re-apply for larger loans as time goes by

If you are asset rich without the cash, you could always take out a smaller equity loan (as tech/a mentions), say $75,000, then use this for a margin loan which may give you $250,000 in the market....make your own risk allowances from there.  On $250,000 you have a further $25,000 buffer with most marginlenders, which is ample.

This is all my own opinion, but until you are disciplined & have a consistant winning strategy, there is no point to any leveraging.


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## rozella (18 March 2006)

G'day crackaton,

With marginlending, the margin lenders send out an offer to prepay the next years interest.....all you are doing is pushing taxable income into the following year, but it is one method.

Another is, if the situation is right, buy into some LPT's & banks in June, as most go exdiv late June.....sell prior to 30th June......take the loss, & buy back on 1st July if you wish......the dividends are also paid in the next FY.

Have a yarn to your accountant prior to doing anything, don't take my word for it.


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## 123enen (18 March 2006)

crackaton said:
			
		

> Guys seriuous question here. I have some cash in an account and I want to minimise my tax. The only way I know is to negative gear but I want to do this with shares. Is this possible? Any thoughts?




Taking out a margin loan allows you to do what you wish. It is a form of gearing and the interest you pay is a tax deduction. Instead of buying property with the money the bank lends you, you are buying shares.

If you are concerned about the money you have in your existing accout then, relative to this topic,  
1. put that money into your margin loan account and that money can be used to pay for your portion ( equity)  in the shares you purchase on margin.

2. Pre pay some interest this tax year for money you commit to borrowing for margin trading next tax year. This pre paid interest will become this years tax deduction.

Be careful - if you run a margin loan, have some back up cash. It can be in any account , including your margin account, but you will need it if things go south and you enter margin call status.  If you do not have back up cash to release you from margin call then the bank, ( they will attempt to contact you first) ,  WILL sell one of your stocks.


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## freja (18 March 2006)

My Mum had approx 190k worth of shares and borrowed half of that in margin lending, they charge the interest but if her shares drop drastically in price, she was forced to sell with JB WERE. This margin lending is still in effect a year after because she had blue chip years so is still at low risk.


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## wayneL (18 March 2006)

tech/a said:
			
		

> Ofcourse you can trade in a discretionary manner and have winning trades.
> Even a string of winning trades.
> 
> I'm interested Wayne if you believe that given any set of discretionary rules you can guarentee the same,and how?




It's simple tech, and it's similar to how mech traders think they can guarantee performance and then "discretionarily" discontinue their system if conditions become unfavourable. (You realise you become hoisted by your own petard, with statements like this, yes?)

It's called expectancy and I believe you are well aquainted with the concept... just used a slightly different way. 

To be quite honest, I don't know why I bite when someone says T/a is nonsense, disc trading is nonsense, this is nonsense, that is nonsense. 

When someone starts on this I'm just going to turn off because it's unmitigated BS. Pure ego talk.

The are a hundred ways to skin the market cat and all work, if the practitioner knows how... same as any business.

Did you know it's impossible for a bumblebee to fly? But in the end there you go. Good night and God bless :sleeping:


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## tech/a (19 March 2006)

> It's simple tech, and it's similar to how mech traders think they can gaurantee performance and then "discretionarily" discontinue their system if conditions become unfavourable. (You realise you become hoisted by your own petard, with statements like this, yes?)




Wayne --you and many others seem to be missing the point and thats the point which gives the mechanical trader the confidence to trade what most consider larger accounts,Borrow and leverage,trade their own SMF.I'll make that point again.
*They have a BLUEPRINT that if they trade within its parameters guarentee profit.*
Stopping trading the method then *ISNT* a discretionary decision its a business decision and is quantified.
Stopping outside the rules/numbers of  your method could be a discretionary decision,for any reason--liquidating capital for another purpose is perhaps one.But thats not an intrugal part of the reason a mechanical/systems trading method is more consistant and reliable than disc trading methods.




> It's called expectancy and I believe you are well aquainted with the concept... just used a slightly different way.




Im interested in the Different way?

I you and anyone who trades in a disc way can come up with any set of conditions and variables apply it to some charts and discover a Positive Expectancy.Problem is after 100 charts or 1000 charts that positive expectancy can be ruin.A mechanical/systems trader has a much better idea after testing millions of trades wether that positive expectancy is genuine.For Duc even what we do is not enough!




> To be quite honest, I don't know why I bite when someone says T/a is nonsense, disc trading is nonsense, this is nonsense, that is nonsense.




Frankly I dont mind good discussion on any topic,I think what annoys you and me is material presented WITHOUT varifiable substance.If I post anything on these topics I generally have something that can prove my arguement,or at least add to the discussion by example.If others do this rather than make "hypothetical,this is what I believe without any practically applied Basis"
Then we can all learn from the practical examples/arguements presented.
There is far to much,this SHOULD work,COULD work,WOULD work IF ONLY,type of theoretical discussion on BB's.
Whats wrong with THIS DOES work and here it is .



> When someone starts on this I'm just going to turn off because it's unmitigated BS. Pure ego talk.




Dont know where you get the ego inference from,I certaintly completely believe that these discussions and my input are varifyable,honest proven trading methodology.Its success has been fantastic and as its the only live varifyable method available for discussion to which I refer to and countless others use as a bench mark----everytime I refer to it I'm LABELLED EOGOTISTICAL.--thats the purist of B/S. Duc honestly believes his theories and is constantly testing/discussing them I dont think his posts are ego driven when instigated---a bit jumps in during discussion--but all in all think they are adding to ASF.



> The are a hundred ways to skin the market cat and all work, if the practitioner knows how... same as any business.




This is where we do differ.
You are dead right---however most small business and novice traders dont work with numbers.Most small busineses wouldnt know a Quick Ratio from a positive expectancy calculation.Most small businesses fail or underperform,so do most traders.I've been in business 30 yrs and when I understood the "NUMBERS" of business It doubled for many years and now has positive growth most years.I've been trading 12 yrs--same here.
So I pass it on with varifyable discussion NOT THEORY.

People can trade as they wish if they can see the merit in my work fine,if not fine as well.

*Crackaton*

Think youre snaffled.
While you can claim forward paid tax as a deduction you still have to pay the tax on $$s earned.So if you use the money you may not be able to pay the tax.

*On Margin calls.*
You can liquidate some of your stock holdings to honor a call.Dont have to sell all.Once you get up and running a call should be rare as hens teeth as your profits will keep you well within terms.Of course you can re invest profits (I Do).

*Bulldust*

Thanks for the patronising,and another quality post adding depth to the discussion.
Rosella has touched on the way I use Equity loans and margin.
You can have the best of both worlds with minimal risk and piece of mind.

But hey I wont go into how I use them as it would only be seen as egotistical.
Particularly if I talk about 3 methods, 3 equity loans and 9 securities.

Retirement doesnt guarantee Business Savvy,just as a knowledge of Fundamental company analysis doesnt guarantee successful investment.


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## tech/a (20 March 2006)

Wayne/Others.

Rather than dismiss as B/S why cant there be constructive presentation of why you think this is the case,with evidence to support your veiws?

I and I'm sure many others would be all eyes.


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## RodC (20 March 2006)

rozella said:
			
		

> A margin loan is revolving credit, basically with no limit, you don't need to re-apply for larger loans as time goes by




Unfortunately this varies with lenders. BT automatically increase your limit as the values of the holding increase. But with comsec you need to apply for an increase in credit limit. I don't know about the others.

Rod.


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## rozella (20 March 2006)

Thanks for that Rod, I was not aware of it.  I don't deal with them.  It sounds like a hassle that should not be required.  

Do they have the option of capitalising the interest & brokerage to the loan ?


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## RodC (20 March 2006)

Yes, interest and brokereage can be capitalised to the loan, exactly the same as for BT.

They also charge a $10 transaction fee for each buy/sell which somewhat negates the low $19.95 brokerage.

Rod.


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## bullmarket (20 March 2006)

Hi rozella




			
				rozella said:
			
		

> G'day bullmarket,...................
> 
> ...............This is all my own opinion, but until you are disciplined & have a consistant winning strategy, there is no point to any leveraging.





Yes :iagree: 100% with you re having discipline in investing/trading before contemplating using borrowed funds (equity loan, margin loan, personal loan or whatever) for investment/trading purposes.

But imo one's ability to apply and stick to discipline can be tested during paper trading (the pros and cons of which have been discussed elsewhere) and while using their own non-borrowed funds.

I see a margin call as an enforced pseudo stop loss.  If one is disciplined in keeping their losses small then imo they should be able to apply stop losses themselves without having to rely on margin calls to teach them discipline as you suggested.

But as you said, it's each to their own and my personal preference is to use equity loans for borrowing to invest (assuming of course one has equity in a suitable asset) and if someone then wants to borrow beyong their equity then they can always look other loan options available to them.  I don't see any problem with that as long as interest repayments can be met comfortably after allowing a buffer for potentially rising interest rates.

cheers

bullmarket


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## rozella (20 March 2006)

G'day bullmarket,



> But imo one's ability to apply and stick to discipline can be tested during paper trading (the pros and cons of which have been discussed elsewhere) and while using their own non-borrowed funds.



I can't agree that paper trading will test discipline, however, it will test the strategy.



> I see a margin call as an enforced pseudo stop loss. If one is disciplined in keeping their losses small then imo they should be able to apply stop losses themselves without having to rely on margin calls to teach them discipline as you suggested.



Yes, they should be disciplined, however, the threat of a margin call will ensure that they are.


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## bullmarket (20 March 2006)

ok no problem rozella 

We'll just have to agree to disagree but I accept that in some cases paper trading may not realistically test one's discipline to stick to their plan but imo if you can't stick to a plan when paper trading then there is even less chance you will stick to it when under additional 'emotional' stress when commiting real funds.  

But having said that I know of cases where paper trading has been beneficial and provided useful information when they were starting out.  The usefulness of paper trading depends a lot, I suppose, on peoples' temperament and attitudes.  

There are people (whether they are in a minority or not I have no idea) who have successfully taught themselves how to set and be disciplined enough to stick to stop loss levels during paper trading which would have helped them greatly to protect their capital when commiting real funds.  They didn't have to rely on suffering margin calls to teach them discipline. 

Imo paper trading is just one option you can use to test/teach strategies/discipline provided of course you have the right aptitude, temperament and attitude 

cheers

bullmarket


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## It's Snake Pliskin (20 March 2006)

rozella said:
			
		

> G'day bullmarket,
> 
> 
> I can't agree that paper trading will test discipline, however, it will test the strategy.
> ...




I totally agree with rozella.


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## wayneL (20 March 2006)

tech/a said:
			
		

> Wayne/Others.
> 
> Rather than dismiss as B/S why cant there be constructive presentation of why you think this is the case,with evidence to support your veiws?
> 
> I and I'm sure many others would be all eyes.



https://www.aussiestockforums.com/forums/showthread.php?t=2958


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## rozella (20 March 2006)

G'day again bullmarket,

By having a healthy discussion on this subject may help others that are thinking about leveraging.


> They didn't have to rely on suffering margin calls to teach them discipline.



I did not mean to actually wait for a margin call to happen.  I mean more like a "policeman on the beat" knowing that if you don't keep your portfolio tidy, the marginlender will contact you.  They are helping you as well as themselves.

It has disciplined me as a trader, yet I have not ever received a margin call, & I suppose it sped up the learning process.

For a margin call to happen, firstly you must have gone past your credit limit, & secondly gone past your buffer which depending on the marginlender is 5% to 10% of your total portfolio value beyond your credit limit. i.e 105% or 110% of available credit.  So an extra-ordinary situation must happen for you to have a margin call.  I like to maximise my return on capital, so I am in & out of the buffer zone on a daily basis, yet no call.

Extra-ordinary situations do happen, such as the terrorist attack on America in 2001.....I was in the buffer zone on 3 separate margin loans when this happened, but unwound my trades gradually without panic (but concern as expected) over the period before America resumed trading, then was back in the market 100% within 2 weeks at very low prices.  As it turned out, I had the best trading month in my history the following month of October. 

In this situation, if I had an equity loan, there would have been no pressure upon myself to act, not saying that I would not have acted, but I had a very good reason to act.  And as it turned out in hindsight, prices came back up in October, but they may have lingered for some time.  Those that did nothing mostly came square or a little better, & those who sold down & re-entered at very low prices did very well, but that part is not a margin loan issue as you well know.


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## bullmarket (20 March 2006)

hi rozella

No problem   I think we both agree that a strategy and discipline are a must-have prerequisite before using borrowed funds be they an equity loan, a marging loan or whatever for investing or trading.

We seem to disagree on the merits of paper trading and types of loans, but that's fine.....paper trading and types investment/trading loans definitely come under the heading..........."each to their own" 

cheers

bullmarket


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## rozella (20 March 2006)

We made it bullmarket,

It would be a boring world if we all agreed with each other.

Cheers


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## RichKid (31 May 2006)

rozella said:
			
		

> We made it bullmarket,
> 
> It would be a boring world if we all agreed with each other.
> 
> Cheers




Hi Rozella,
An informed and robust debate is always welcome. Your observation reminds me of a favourite quote: _If everyone is thinking the same thing then someone isn’t thinking.
-General George Paton_

Here's an article on margin lending.



> Lend your portfolio a hand
> 
> http://www.smh.com.au/news/money/le...1148956396766.html?page=fullpage#contentSwap2
> 
> ...


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## Sean K (31 May 2006)

Margin Loaning is great when then market is going up, and is going to go up for another few years - like 3 years ago! Now, the market is due for a rest and maybe a crash, if you think Michael S is right. 

Going into a Margin Loan now is still good for the long term as ong as you don't, say, buy 100K of one dodgy specie uranium company! Diversify, diversify, unless you have insider info. In which case please PM me. 

The best place for borrowed money right now is in managed funds. Buy any of Platinums and you're safe. Except their tech fund. Very ordinary. Then, use the excess equity as it grows to buy a specie uranium company.


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## suhm (3 June 2006)

123enen said:
			
		

> Taking out a margin loan allows you to do what you wish. It is a form of gearing and the interest you pay is a tax deduction. Instead of buying property with the money the bank lends you, you are buying shares.
> 
> If you are concerned about the money you have in your existing accout then, relative to this topic,
> 1. put that money into your margin loan account and that money can be used to pay for your portion ( equity)  in the shares you purchase on margin.
> ...





123enen how do you exactly go about parking cash in your margin loan account without paying it off. Does money in a CDIA act as a sort of offset account to the margin loan. Or do you mean that you put the money into your margin loan and draw down some equity if you require access to the money.

I have spare cash which I wish to keep on hand but borrowing money at more than 8% on the margin loan when I have cash sitting in an account earning a little over 5% seems a little silly to me.

Thanks if anyone can give me some help.


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## tech/a (3 June 2006)

Your paid intesrest on any positive balance..

Lets say you have $100K and using margin on average you can recieve around 2 x leverage or 66% on margin.

Your loan and subsequent interest payments wont kick in until you have $101K or more in stocks held.

If you have $120K in stocks held interest is only payable on $20K.
So if over the year of the 200K you could use you only average 160K usage of Margin lenders money then pre paying would have made the money very expensive!


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## rozella (3 June 2006)

G'day suhm,

I think 123enen is referring to place spare cash into the margin account to reduce the borrowings temporarily as the interest is now 8%+, so this would be better than receiving 5% in another account.  I do this all the time, it is just like parking cash into your credit card to save some interest.

You will still have the available credit as that depends on the total LVR's of your portfolio + cash.  Margin loan accounts are flexible from one day to the other.


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## rozella (3 June 2006)

Must have been typing at the same time tech/a.  Just reading your post, I don't think I have ever had a positive balance to take advantage of being paid interest.....maybe Sept 11 2001 for a few days.


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## laurie (3 June 2006)

So if you can bring your interest forward to this Tax year can your sell your shares now and put it in next year Tax return!   

cheers laurie

ps sorry slightly O/T


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## 123enen (3 June 2006)

suhm said:
			
		

> 123enen how do you exactly go about parking cash in your margin loan account without paying it off. Does money in a CDIA act as a sort of offset account to the margin loan. Or do you mean that you put the money into your margin loan and draw down some equity if you require access to the money.
> 
> I have spare cash which I wish to keep on hand but borrowing money at more than 8% on the margin loan when I have cash sitting in an account earning a little over 5% seems a little silly to me.
> 
> Thanks if anyone can give me some help.




Suhm,
It's not just a matter of borrowing money versus using your cash. If you borrow through a margin loan you pay the 8% interest BUT you get leverage.

For example with $5000 of your cash you can buy 268 PBL shares at $18.65  each.
If you use that $5,000 through a margin loan you can buy 1072 PBL shares, which have a leverage ratio of 75%. Total value of shares is $19,993.

The bank will loan you 75% of the total value. ie. $14,993 at 8% interest -and you have contributed $5000 of your money. 

So it is more than a matter of saying why should I borrow money to buy shares when I already have money. It is more a matter of using your money as collateral to borrow more money.

However IF it is simply a matter of where do I park SPARE cash then as Rozella advises - money in the margin account helps you reduce your interest bill and money in CDIA helps you earn interest. You can draw down your money either way.


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## suhm (3 June 2006)

Thanks for the quick reply rozella and tech/a, this really is quite a helpful forum.

I have been using the margin loan to add a few stocks to my portfolio and as my lvr is quite low I have been letting my interest capitalise. This has been really quite convienient as I only need to deduct the interest owing each year from my tax return. Hence I have never actually put cash in or taken it out of my margin loan account.

I went trawling around the commsec website but its a bit "....." useless when it comes to finding information except when their trying to sell you their product, all I could find was a direct debit form. So I was hoping someone would be able to help me by telling me how to go about parking my cash in the margin account.

Sadly I don't have that much extra money to enjoy a positive balance either rozella.

suhm
P.S. I'm not usually such a technological dunce.


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## 123enen (3 June 2006)

Ring CommSec Margin department  Ph.131709
Tell them you wish to transfer some money from x account to your margin account. They will do it for you.



http://www.comsec.com.au/Public/InvestIn/PDFs/Margin Loan Brochure.pdf


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## RodC (5 June 2006)

123enen said:
			
		

> Ring CommSec Margin department  Ph.131709
> Tell them you wish to transfer some money from x account to your margin account. They will do it for you.
> 
> 
> ...




You can use bpay to deposit into a comsec margin loan.

Rod.


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