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Real Business : Autumn 2008
REAL BUSINESS AUTUMN 2008 31 HOW IT WORKS A MARGIN CALL CASE STUDY Peter, 54, and Mary, 52, visited consulting accountants and financial planners Snelleman Tom in September 2001. After conducting an extensive review of their situation, it became apparent that by their desired retirement age they were going to have a shortfall of $107,000 in the level of desired retirement assets. The clients advised the firm that they only had $3500 potential extra savings a year. The firm did the calculations on investing this amount into super. However, it wouldn't produce the amount of assets that were needed. Margin lending was then proposed as an appropriate strategy. "We spent a large amount of time discussing the risks of the strategy," says CEO Martin Kerrigan. "These included, but WHAT IS IT? MARGIN LOAN TERMINOLOGY n A MARGIN CALL: this can occur if the market value of your investment falls below an agreed amount or if the market drops dramatically. To meet a margin call, you need to boost the level of assets securing your loan. You may have to find extra cash to pay the lender by selling part of your portfolio, or give the lender extra security. n THE PREMIUM MARGIN: the market value of the particular position at the close of business each day. It represents the amount that would be required to close out your option position. (Source: www.ASX.com.au) weren't limited to, the likelihood of a margin call, the possibility of negative equity, rising interest costs and job loss. Having gone through the process, they agreed to borrow $50,000 on the home loan re-draw facility and to margin loan a further $50,000, so that when added to their $10,000 of savings there were $110,000 of investments that could be made. Shares and managed funds bought by investors appear on their lenders' approved securities lists. All income from the managed funds and shares was directed to paying the interest on the loans. In margin lending, the set-up of interest payments varies depending on your type of loan. For example, interest may be paid monthly in arrears or yearly in advance. At the low point of the current cycle in March 2003, the investment was worth $93,000. It is now worth $193,000. * Case study from Martin Kerrigan, chair of CPA Australia's Financial Advisory Services Centre of Excellence, and CEO, Snelleman Tom n MARGIN-EQUITY RATIO: a term used by speculators, representing the amount of their trading capital that is being held as a margin at any particular time. n RETURN ON MARGIN (ROM): often used to judge performance because it represents the net gain or net loss compared to the exchange's perceived risk as reflected in the required margin. (Source: www.answers.com) PHOTOLIBRARY NET GAINS For more information, check out www.asx.com.au/investor/options/trading_ information/margin_lending.htm