Margin lending questions

[stocknoobie]

Re: Margin Lending

Thankyou very much for all of ur valuable comments and suggestion. However some ppl may missed the topic ... i am not after any information on how a margin lending account works, such as the risk involve in margin lending, we all know investment does come with a degree of risk, i mean any investment. The information i want to know, like how many percertage increase of the total investment portfolio with a margin lending account compare with a normal cash trading account over a certian period of time .... if anyone else can post an actual example of how they use a margin lending account and the amount of return they made during a period of trading. I am trying to be a active trader, so i want more money to invest and maximise the return on my investment portfolio. finally most people posted some very good information and data, however some ppl may need to rethink before they posted it, else it's a waste of our times and keep reading useless stuff. once again a big thankyou all.

 

[rozella]

Re: Margin Lending

stocknoobie,

This is a marginloan spreadsheet that was commenced on 1st July 2004, starting with $75000 working capital.

It shows 2 results.
1. From 1st July 04 to 9th December 05 (527 days)
portfolio has increased $60385.38 (80.51%)

2. From 1st July 05 to 9th December 05 (162 days)
portfolio has increased $25663.12 (23.39%)
pending dividends to be paid not incl above $5590.19
cash in hand $$65770.13
purchases in the 162 days 71
wins 40
losses 20
open trades 11

Comments: portfolio has come off its high from 2 weeks ago due to a number of stocks being quoted exdiv & also this last week saw the banks take a tumble, which were sold after reaching trailing stops, however the pending dividends will be all paid by the 21st Dec which will boost the portfolio.

Transactions are supported by Margin Trading 2 and Trading Diary 2

 

[rozella]

Re: Margin Lending

stocknoobie,

You ask for a comparison with a normal trading account....well this is difficult because you would be using approximately one third of portfolio size, so it would affect your buying decisions. For a direct comparison you would need to trade all the same stocks with your position size scaled down to about one third used in the margin trades.

Margin loans are usually between 7.9% to 8.5%, & I have used 8.4% in the example which with the brokerage is capitalised to the loan.

So therefore the additional stocks you can buy because of marginlending must cover the compounded interest bill.....in the example it is well covered.

Is this the type of info that you are after ?

 

[BraceFace]

Re: Margin Lending

The information i want to know, like how many percertage increase of the total investment portfolio with a margin lending account compare with a normal cash trading account over a certian period of time .... .

Unless I missed something in your question, I think the answer is quite simple....

Your portfolio will increase by exactly the same percentage, regardless of whether you have a margin loan or just a cash account.
The BIG difference is with a margin loan your entry point is higher. In other words X% increase (or decrease) in a small amount of money, is only a small amount of money but X% of a lot of money (like that borrowed in a margin loan) is a lot of money. Thats how gearing works - you start with more investment capital, you stand to make a larger profit or loss than with a small amount of cash of your own.
The actual % increase is exactly the same.

Obviously this equation sarts getting a little clouded when you start factoring in Interest on the Margin Loan, Dividend reinvestment etc, but you are still better off if you can borrow money to gear up your investment.
But like I said in my last post - be prepared to take a hit if you invest borrowed money in speccies. Not a good idea IMO.

Cheers

 

[The Barbarian Investor]

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

Just thinking when I read this, how about if you used the equity in your house rather than a Margin Loan (No nasty calls and a lower Interest rate to boot?)

Also, even if you did get a Margin Loan (say at 8.5% interest) and invested in several Blue chips rather than traded (say you were looking to get a 10% return for the year on your monery through dividends, notwithstanding any price increases) would this be worth looking at for someone looking to get into the market and invest??

 

[tech/a]

Re: Margin Lending

Barbarian

This is what I have done,for 3 yrs with techtrader.

My idea (in the future)was to take a % of equity from each property I have and invest it in a portfolio.I was going to trade 3 different methods.
Techtrader,Stevo's Bollinger Band Weekly method and Rossellas dividend stripping.

Now with the advent of CFD's rather than having to take 30-50% out on a line of credit from a property,I only need 10%.
The other thing I wish to point out is you dont have to and shouldnt leverage yourself to the max (In my veiw).
While I may have $200K equity in a Property I will only use a max(In my case) of 30% of that.So when trading CFD's,I'll only be trading $70K from that Property,costing me $7000 to the provider.You'll need to have a line of credit that will allow you to get to the $70k if all falls in a hole.

Margin calls are a great wake up call in my view.I've never been called.
But if your method of trading has you lose enough to be called and that loss is lower than the maximum initial drawdown of the method your trading---then it needs to be halted trading and reveiwed.
And if you dont know these figures---what are you doing trading leveraged instruments???

To me having your capital locked away in equity while comforting is wasteful.
However if your going to release it you really need to be right on top of the numbers.

 

[tech/a]

Re: Margin Lending

Meant to include above.

Knowing the initial capital drawdown then you can leverage to a comfortable level.For Techtrader thas 2:1 so my $70K leveraged 2:1 would require $14,000 to the provider.Which means that if the 8.6% maximum was reached then the $14,000 would cover it.EG $140K*9% = $12600.

 

[rozella]

Re: Margin Lending

Margin calls are a great wake up call in my view.I've never been called.
But if your method of trading has you lose enough to be called and that loss is lower than the maximum initial drawdown of the method your trading---then it needs to be halted trading and reveiwed.
And if you dont know these figures---what are you doing trading leveraged instruments???

Exactly right tech/a. The marginlender is like big brother making sure that you do your job correctly. If you have allowed your stocks to fall to warrant a margin call, then you are pretending to yourself. The marginlender is saving you from further loss if you have a margin call.

I wonder how many bought TLS @ 850.0 approx, & still hold at 396.0. If you bought this on margin, there is no way you would still own it. You would have been asked to "cough up" or sell. Even if you had other stocks propping it up with margin, TLS would have weighed heavily & you would have sold at 600.0 at the lowest (guess)

Marginlending teaches you discipline.....how to keep a tidy portfolio.

 

[BraceFace]

Re: Margin Lending

)

Also, even if you did get a Margin Loan (say at 8.5% interest) and invested in several Blue chips rather than traded (say you were looking to get a 10% return for the year on your monery through dividends, notwithstanding any price increases) would this be worth looking at for someone looking to get into the market and invest??

Don't forget that the costs of your running your investment are fully tax deductible (including the 8.5% interest).....

I also agree that having someone tap you on the shoulder and say sell something or cough up some cash (ie margin call) is a good way to make you reevaluate you investments.

 

[BraceFace]

Re: Margin Lending

)

Also, even if you did get a Margin Loan (say at 8.5% interest) and invested in several Blue chips rather than traded (say you were looking to get a 10% return for the year on your monery through dividends, notwithstanding any price increases) would this be worth looking at for someone looking to get into the market and invest??

Don't forget that the costs of your running your investment are fully tax deductible (including the 8.5% interest).....

I also agree that having someone tap you on the shoulder and say sell something or cough up some cash (ie margin call) is a good way to make you reevaluate your investments.

 

[quinn123]

Hi,
I have been doing some reading on margin lending and I believe negative gearing may suit my current financial position and investment goals.

I’m a young professional (23 years old) with a relatively stable income. I have been researching the share market for approximately a year, and have made some small share purchases over the last 3 months.

I’m only interested in mid-long term investments (5< years) rather than share trading. My current financial standing allows me to take on increased risk.

If I do decide to take out a margin loan it will most likely be with Commsec.

On the Commsec site they always use an example where someone buys a single stock that is listed on their approved shares list with a certain lending ratio which gives them the appropriate lending value for which they can borrow or choose to decrease for a larger buffer from margin calls.

My first question is: If I wanted to take out a margin loan and diversify between a number of companies, how will the margin loan be initiated? Are you required to have already invested in an approved share (on commsec’s site with a particular lending ratio) to use as security for the loan? Than you can use the loan from that approved share to invest in whatever you like? Or is it possible to start off with cash?

E.g.
If I wanted to open a margin loan using BHP shares as security, and BHP contains a $30 share value and a lending ratio of 70%. If I wanted to borrow $50000.00 I would have to obtain 2381 BHP shares worth $71428.57, and I would be liable for 30% of that which would be $21428.57 (714 BHP shares).

But this forces me to purchase a lot of shares of one company, so do you just do this in smaller amounts for a number of companies if you wanted to diversify?

My second question is: Are LVR (loan value ratio) and Lending value the same thing? How does it get calculated in a diversified portfolio? Does it just get calculated for every share separately that you have applied for a margin loan or is it somehow a total market value of your share portfolio?

E.g.
If I include the above example with BHP and I chose to borrow $50000 dollars and invest in other companies, how does the lending value get calculated, because the market value of the other shares would vary? So I’m basically confused as to how you manage the margin loan LVR in terms of avoiding margin call in a diversified portfolio.

If anyone can clear some of this up that would be greatly appreciated.

Cheers,

Quinn

 

[Naked shorts]

Are you feeling confident about keeping your job? I mean really confident?

 

[quinn123]

I'm not "really confident", but I should have stable employment for this year. Than hopefully by then things begin too pick-up, so I can be really confident.

If I got into a margin loan in 2007, when confidence and employment were high, this crash would have affected my portfolio.

If you are suggesting that it is a bad time to consider leverage due to the current volatility, I agree I'm planning to wait until there is increased market sentiment.

Thanks for the reply, but I don't want to discuss market timing. If someone can answer my questions that would be handy for me, and probably others as well.

Thanks

 

[quinn123]

I wrote up another example to show the problem I’m having. This is just an example and completely made up.

E.g.
If I wanted to take out the following Margin loan with the following securities:

Security____LVR____Amount of shares purchased________LV
BHP_______70%_________$5000_____________________$3500
BPT_______60%_________$5000_____________________$3000
FXJ_______70%__________$5000_____________________$3500
Total LV - $10000
LVR – Loan Value Ratio
LV – Loan value

That would leave me with a total lending value of $10000. Than say I chose to invest in the following portfolio:

Company_____Amount of shares purchased
BHP______________$5000
BPT______________$5000
FXJ______________$5000
ROC______________$10000 (not on accepted securities list)

At time of purchase I have:
Portfolio market value - $25000
Loan Balance - $10000
Loan Value - $10000 (5% Buffer - $500)

Than say BHP drops from share price of $40 (my purchase price) to $20 on 1st March ’09 but all my other shares stay the same.

On 1st March ‘09:
Portfolio market value - $22500 (reduced in value)
Loan Balance - $10000 (hasn’t changed)
Loan Value - $8250 (5% Buffer - $500) (reduced in value)

So because I have not payed off any of my loan yet and my loan value on 1st March ’09 with the buffer is $8750 (my LVR is really 66.66667% for my total portfolio). I would have to pay at least $1250, taking the buffer into account, to meet my loan balance and get out of the margin call.

One thing I still don’t understand is what if ROC fell in price, which is not a secured share (not on approved list of shares), but just a share I bought with the loan money? Is it only securities that have an LVR that can affect the LV price? I must be missing how the portfolio value is linked to LV or something.

Thanks

 

[mattlaw]

Hi quinn you should check out this thread for and answer.
https://www.aussiestockforums.com/forums/showthread.php?t=14370

 

[Knobby22]

If ROC fell in value, it would have no effect as you are not using any equity from it to fund the margin loan.

 

[quinn123]

If ROC fell in value, it would have no effect as you are not using any equity from it to fund the margin loan.

OK makes sense now. Cheers for the link also Mattlaw.

 

[Trevor_S]

If I got into a margin loan in 2007, when confidence and employment were high, this crash would have affected my portfolio.

IMO
1. Run conservative LVR's (<40%) (I typically run less then 30%)
2. I see no sense in making a loss and "hoping" for a CG to compensate, the market could be flat for years (but then it might not be ) You can still claim your interest payments as a tax deduction and assuming you are on a tax rate of 30% and you have fully franked shares, then your franking credits credits should cover tax on the dividends ( I see Mr K Henry is advocating we remove dividend imputation altogether, so who knows what will happen).

I would be ensuring I was positively geared (div's are falling so watch the calcs there), also helps if you do lose your job, as the dividends pay the loan and you get the franking credits paid to you as a tax refund... lots of low PE, high dividend paying stocks with the "potential" for CG, work with those

3. Use your existing shares as equity but remember they can sell them out from under you if you get a margin call. See note 1 above.

or consider buying a house, using the FHBG and renting a room out for extra cash to pay it own more quickly.

Best of luck to you...

 

[quinn123]

IMO
1. Run conservative LVR's (<40%) (I typically run less then 30%)
2. I see no sense in making a loss and "hoping" for a CG to compensate, the market could be flat for years (but then it might not be ) You can still claim your interest payments as a tax deduction and assuming you are on a tax rate of 30% and you have fully franked shares, then your franking credits credits should cover tax on the dividends ( I see Mr K Henry is advocating we remove dividend imputation altogether, so who knows what will happen).

I would be ensuring I was positively geared (div's are falling so watch the calcs there), also helps if you do lose your job, as the dividends pay the loan and you get the franking credits paid to you as a tax refund... lots of low PE, high dividend paying stocks with the "potential" for CG, work with those

3. Use your existing shares as equity but remember they can sell them out from under you if you get a margin call. See note 1 above.

or consider buying a house, using the FHBG and renting a room out for extra cash to pay it own more quickly.

Best of luck to you...

Thanks for your input, I'm sure it would make more sense if I new what CG meant though

Thanks

 

[beamstas]

Thanks for your input, I'm sure it would make more sense if I new what CG meant though

Thanks

CG is capital gains