Margin Loans

By borrowing to invest, or gearing, margin loans increase the amount of money available to you to invest and therfore increase your potential returns as well as magnify your losses if the market falls. However, as with any loan, it’s important to make sure you take a long term view as well as keep in mind a few simple safeguards that may help to reduce risk of loss.

How do you manage margin loan risk?

1) Invest in quality assets

By investing in high-quality shares and managed funds one can reduce the risk of a major loss or margin call. That’s why it’s always a good idea to talk to an experienced and a qualified advisor before choosing investments.

2) Borrow less than your total loan limit

Limiting the amount you borrow is the secret to successful gearing. This makes sure you can easily meet your regular interest payments and cope with any sudden financial emergencies.

3) Repay and re-invest

Regularly paying your loan interest helps to stop your loan balance from increasing. Not only does this reduce the risk of a margin call, it gives you the flexibility to invest more money if an attractive opportunity crops up.

Re-investing your distributions or crediting them against your loan also helps to reduce your loan balance.

4) Be aware of timing

There are several timing issues that can add risk to your margin loan:

• your distribution payments may not coincide with your interest payments
• the lending ratio of any investment that you’re borrowing against can change as the value of your investment changes (including reducing to zero) – this can mean a margin call or the cancellation of transactions.

In some circumstances, you may have to repay the loan immediately. This can be the result of:

• a significant fall in the market
• the delisting of a company you have invested in
• a default by a joint borrower
• a default by a third party who provides security for your loan

A PGFS financial adviser can help you secure determine whether a margin loan is appropriate.