the magazine that fast-forwards your career.
Here's how to read the magazine:
by clicking the arrows at the side of the page, or by using the toolbar.
by clicking anywhere on the page.
by dragging the page around when zoomed in.
by clicking anywhere on the page when zoomed in.
websites or send emails by clicking on hyperlinks.
Email this page to a friend
Search this issue
Index - jump to page or section
Archive - view past issues
Real Business : Autumn 2008
30 REAL BUSINESS AUTUMN 2008 BY JANE-ANNE LEE NOT FOR THE FAINT-HEARTED BORROWING TO INVEST IN THE SHAREMARKET AMPLIFIES THE POTENTIAL FOR GAINS, BUT ALSO FOR LOSSES As many people have become sav vier about investments, they are embracing the concept of borrowing money to buy shares and managed funds, which is the essence of margin lending. Using a margin loan, it's possible to borrow money to invest in a range of financial products, including shares, fixed interest securities, and units in a managed fund. Investors can usually borrow between 30 per cent and 70 per cent of the market value of their investments, with the underlying invest- ments acting as security. Under the terms of a margin loan, borrow- ers pay interest on the amount borrowed, just as they would if borrowing to buy a property. But unlike other loans, you may be required to meet what's know n as a margin call. This can occur if the market value of an invest- ment falls below an agreed amount, or if the market drops dramatically. To meet a margin call, borrowers may have to cough up extra funds to pay the lender, provide additional security to the lender or sell part of the portfolio to raise the money. There is often no time to waste as you may have to act within 24 hours or less. That means you need to monitor your margin loan account like a keen watchdog, because, according to the Australian Securities and Investments Commission, your lender may be under no legal obligation to contact you when a margin call happens. It's a good idea to have additional security on hand to deal with one or more margin calls if the market suffers substantial falls. Like any investment, there are pros and cons. With margin loans, there is the oppor- tunity to increase your exposure to the sharemarket through this form of gearing. And by gearing, there is the potential to boost your gains because you can enjoy returns from not only your own money but from money borrowed from a financial institution. There can also be tax benefits from gearing. But borrowing to invest in shares means you are increasing your exposure to investments that can lose value. That's why it's often said that margin lending amplifies the potential for gains and losses. Consider the case of broking house Tricom, which was unable to cover the cost of trades when the worst sharemarket fall in 18 years brought a record number of margin calls in late January. Compared to investing in property, the underlying security in margin loans is likely to experience more short-term fluctuations in value. Just as your property can be repos- sessed and sold if you default on your home loan, your investments may be sold at a loss by your lender if you default on your loan. It will just take place much faster! There are other differences, too. The interest rate is higher than borrowing against a property, and the ratio you can borrow is typically less. Martin Kerrigan, chair of CPA Australia's Financial Advisory Ser vices Centre of Excellence, says: "The maximum you can borrow against shares or managed fu nds is 70 per cent, whereas the maximum you can borrow against property is 100 per cent." It's possible to reduce the risk of a margin call by gearing at a reduced level, say 50 per cent rather than 70 per cent, diversifying across a range of sectors, and evaluating your portfolio at regular intervals. Even if you follow all of the above, this form of investment, which Kerrigan says pre-dates 1989, is not for the faint-hearted or inexperienced investor. It suits those on a high income, seeking a medium- to long-term investment, and who are willing to tolerate greater risk for the potential of a greater return. Investors will also need to have suf- ficient reser ves to meet a margin call. "The experienced investor recognises that the market goes up and down and is prepared to gear into that," Kerrigan says. "The new investor actually takes a bit more time to understand it as a strategy but then realises it is a way to fast-track asset growth, whereas the average investor is a bit debt-averse." n lowdowN: mARgIN LENdINg