Margin lending questions

[stocknoobie]

hi everyone

I am thinking of opening a margin lending account, but don't know if it's a bit risky since i only started trading 1 month ago. Plus i got alot of questions about margin lending accounts, such as brokerage rate for margin lending account, minimum loan and how do they calculate interest rate? For example if i buy a stock then sell it with in a month, how much interest will the lender charge? Thanz if anyone at least show me how to obtain more information.

 

[money tree]

Re: Margin Lending

margin lending is an uneconomical and inefficient means of gearing into the market.

second, now is not the time to be getting in.

third, you need a lot more experience.

 

[tech/a]

Re: Margin Lending

Leveraged trading is not for the complete novice,here I agree with TREE.
The other 2 points of Tree's are opinion with some truth to both.
But--

Ive traded Margin for 4 years and have found it a hassel free way to leverage positions.
Firstly you will only be able to trade stocks listed on the lenders Margin List.
Loan Ratios will vary from 45% to 75% on average--meaning that any one stock of a 75% lending ration can only carry 75% of your total portfolio.
Lending Ratios are never a problem with a portfolio of 10 stocks equally weighted.
Interest rates vary and are a few points cheaper paid up front (I dont ).
Interest is calculated only on the funds used when they are used.
EG you have 50K as security and have 50K of Stock trading---with the ability to buy another 70K on margin.
Currently you would not be paying interest and would only pay the interest on funds over the 50K on a daily rate while they were used.


Your lender will have a minimum level they will allow your portfolio to fall to and if it does you will get a call from your broker (A Margin Call),so lets say your portfolio has fallen 22% and your call level is 20% you will be asked to make good the 2% and the 5% buffer. You can either pay cash----or sell some stock,hock the mother in law,or walk the streets may work for some!!
To bring your account in order.

I use BT (Bankers Trust) and St George. both have net sites.
Unlike Tree I find Trading Margin excellent for my form of longterm trading.
Find a good broker---I'm currently looking at Morrisons as I'm sick of paying $100s in and out of trades from brokers,who simply place a trade.

Margin Lending Explained Paul and Jorrod Martin ISBN0 701636440 is a good read.
Mastering Risk Mike Lally ISBN 0 7016 3667 X is also a must read for you.

Think minimum margin capital is $15,000.

 

[dutchie]

Re: Margin Lending

Money Tree

Could you explain why "margin lending is an uneconomical and inefficient means of gearing into the market"?

What is a more economical and efficient means of gearing?

Thanks

 

[RodC]

Re: Margin Lending

Like tech/a I've found margin lending an excellent way to leverage positions.

I've been using margin lending for about 4 years, without any hassles.
Never had a margin call, though I have been into the buffer a couple of times.

I use Comsec and BT.

I know with comsec if your overall portfolio LVR is low enough then you can buy stocks not on the margin list though of course these don't have any lending value so your effectively using your own funds.

Interest is paid daily on open positions, so if you've purchased $10K of a 70% LVR share you'll be paying interest on $7K for each day you hold the stock.

Rod.

 

[clowboy]

Re: Margin Lending

ROD,

I don't use comsec so I cant be 100% sure on this (it is correct for BT though).

BT (and i think commsec) have minimum loans of 20k for margin lending so if you only have a loan balance of 7k you will still be charged on the full 20k

Double check your charges to the account and see if I am right.

 

[mime]

Re: Margin Lending

Remember with margin lending a 20% fall in stock price could mean 100% of your capital. However a 20% rise could mean a rise of 50%+ jump in your capital.

Gearing is probably the only realistic way to make alot of money on anything investment. Property or stocks.

Just a thought. Borrowing on those interest free credit cards for short term trading might not be such a bad idea :|

 

[RodC]

Re: Margin Lending

ROD,

I don't use comsec so I cant be 100% sure on this (it is correct for BT though).

BT (and i think commsec) have minimum loans of 20k for margin lending so if you only have a loan balance of 7k you will still be charged on the full 20k

Double check your charges to the account and see if I am right.

Yes, you're right.

BT certainly have that. It doesn't apply initially, so that when you first draw down on the loan you only pay for what you use. But once your loan exceeds $20K then that becomes the minimum for interest calculations.

I don't know about comsec and I can't be bothered checking as it's not applicable to me given my loan balance has never been that low.

Rod.

 

[money tree]

Re: Margin Lending

the LVR with margin loans is quite low (30 - 50%). Interest rates usually contain a premium. High risk of margin call.

alternatives:

LEPOs:

very high LVR (95 - 98%)
lower interest


INSTALMENT WARRANTS:

no risk of margin call
same LVR as margin loan
limited risk

 

[rozella]

Re: Margin Lending

I agree with tech/a's explanation. I rarely trade without margin, however when I first started, I would not exceed 80% of the available credit, now I trade in the buffer zone more times than not (103%). It is a matter of comfort zone & knowing the rules, I operate with 10 to 15 stocks as ideal, using my maximum risk amounts with each stock.....I sleep at nights.

Marginlending is a great teacher of discipline. I have never had a margin call with a conventional lender, but I have heaps of times in the past with cfd's, which I don't use anymore.

The nearest I have had to a margin call, & I was in the buffer zone with 3 ML accounts, was the "September 11th 2001" but was able to work my way through it, selling down over a few days, & coming well out on top during October 2001 (still my best month ever)

I think "you do best, what you know best" , whether its installment warrants, or marginlending. I prefer the latter.....but that is my opinion.

Whichever leveraging you use, you still have to have a consistantly winning strategy, as leveraging magnifies both wins & losses......leveraging does not make you win.

 

[mit]

Re: Margin Lending

I was looking at an ASX50 company awhile back the total volume it traded for the month for a particular installment warrant was less than the volume I wanted to buy. I also noted that the spread was quite large as well. Note that Installment Warrants also have a call option and the entire loan priced in, so that needs to be taken into account if you want to see if the warrant is fair price against the underlying share. I'm thinking of using Installment warrants to buy some solid bluechips when we have a major correction and just put them in the bottom draw. Aren't most installment warrants 50%?

I use Commsec for margin loans and found it great. I find that my portfolio on average allows a maximum lending ratio of around 68% (before the buffer). I keep my LVR at around 60% which is a good buffer. I'm of upping my limit as even during the October downturn my LVR never went above 63% before my stops kicked in.

I like the fact that as your position grows you can take capital out, without needing to sell. When I reach the size position I need, I plan to use this to draw a constant value out of the account monthly while keeping a constant position size and the LVR changing taking up the normal ups and downs in trading.

MIT

 

[RodC]

Re: Margin Lending

I run my portfolios pretty close to the buffer most of the time. I just checked them then and the Comsec Loan is at 66.92% out of a maximum 68.81% and the BT loan is at 67.67% out of a maximum 71.49%. I have a few 75% LVR stocks in both portfolios and generally don't buy anything with less than 60% LVR.

As I said earlier, I've never had a margin call and have only been in the buffer (just) a couple of times.

I do occasionally use instalment warrants, but as mit said liquidity and spreads can be a problem.

Rod.

 

[BraceFace]

Re: Margin Lending

I use a Macquarie Margin Lending account for my Blue Chip (read - Low Risk) share portfolio. Generally they dont lend on speccie stocks anyway. I use 100% of my own cash via an online trading account (low brokerage) if I am investing in anything remotely speculative.
Anybody who knows anything about making money will tell you "you have to use other people's money to make money". Gearing in the sharemarket is just as safe as gearing in real estate - you just have to be sensible about what you invest into. Dont borrow money to invest in speccie stocks unless you are prepared to take a big hit.
My 20c

 

[rozella]

Re: Margin Lending

Another positive for marginlenders is that they are the chess sponsor of your shares, so therefore you can have as many brokers as you like, providing the marginlender deals with them, as it is important to have a broker backup if they have IT problems......such as Sanford atm. You can change brokers very quickly as there is no stockholding transfers to be done.

 

[RodC]

Re: Margin Lending

that's interesting Rozella. I hadn't thought of that.

I just use comsec for my comsec loan and westpac for the BT loan.

Rod.

 

[rozella]

Re: Margin Lending

Rod,

You could also open a basic account with Etrade, which is linked online to BT, & it costs nothing for a backup.

I don't know about comsec

 

[It's Snake Pliskin]

Re: Margin Lending

Money Tree

Could you explain why "margin lending is an uneconomical and inefficient means of gearing into the market"?

What is a more economical and efficient means of gearing?

Thanks

Try CFD's.

 

[RodC]

Re: Margin Lending

Rod,

You could also open a basic account with Etrade, which is linked online to BT, & it costs nothing for a backup.

I don't know about comsec

thanks Rozella, I may look into that.

I'm not too worried about having a backup for the comsec loan as that's my "longer term" account anyway.

Rod.

 

[mit]

Re: Margin Lending

Try CFD's.

Depends on your trading style. If you have low capital or are only trading short term on the largest companies* then CFDs are the way to go

If you hold a portfolio of stocks for more than a couple of weeks I don't think you can beat a margin loan because, you only pay interest on the amount you owe and the interest drops as your position grows unless you borrow more funds. We have had a few pretty good years but if next year is flat then an effective extra interest of 3% on the total position size which translates to 9% against your capital could be a very large bite from your returns.

* This is if you aren't using DMA .I have been doing some short term stuff in CMC with LNN and ORG and the spread can get up to 7 cents and these aren't exactly small companies. This is an effective additional brokerage of 70 dollars for a $7k position. I noticed the problem more with fills and estimate that I would have returned 20% more if I had used margin or DMA. I've just joined Macquarie and am waiting for my password to start trading with them.

MIT

 

[Milk Man]

Re: Margin Lending

....I've just joined Macquarie and am waiting for my password to start trading with them.

MIT

Let us know how you gowith them, im going to sign up with either macquarie or man/e-trade in the next few weeks. What swayed you to macquarie?