Question on margin lending

[kitehigh]

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

 

[rozella]

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

 

[tech/a]

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.

 

[kitehigh]

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

 

[tech/a]

Me variable.

 

[rozella]

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.

 

[123enen]

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.

 

[Smurf1976]

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

 

[Fleeta]

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.

 

[BSD]

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.

 

[rozella]

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.

 

[tech/a]

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.

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

Well most anyway.

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.

 

[BSD]

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 ?

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.

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.

 

[tech/a]

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.

 

[wayneL]

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

 

[tech/a]

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.

 

[wayneL]

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

 

[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.

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

 

[tech/a]

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:



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

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.

 

[crackaton]

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?