Margin lending is a type of loan that allows you to borrow money to invest, by using your existing shares, managed funds and/or cash as security. It is a type of gearing, which is borrowing money to invest.
How does margin lending work?
The amount you can borrow is based on your financial position as well as the allowable Loan to Value Ratio (LVR) of your existing portfolio, being your shares, managed funds or cash used as security. The LVR is the amount of your loan divided by the value of the shares or managed funds being used as security.
If the value of your security drops in relation to the loan amount, you may exceed the maximum LVR. This will trigger a ‘margin call’ and you’ll be required to either reduce your loan amount, contribute additional security or sell part of your investment until your LVR is below the maximum.
For this reason, you need to pay close attention to the value of your investments if you have a margin loan so you can take action if you are in a margin call situation. It’s important to know that the security you use against the loan can be used by the lender to repay the loan.
What are the benefits of margin lending?
A benefit of margin lending is the opportunity it provides to increase your investment exposure. Essentially, borrowing allows you access to more funds, giving you the potential to make additional investments you may not have been able to make otherwise. This can magnify market exposures with the potential to increase returns or allow new purchases to diversify your existing portfolio.
Margin lending can also have tax benefits. For example, you may be able to claim the interest on your loan as a tax deduction.
What are the risks of margin lending?
There is additional risk in borrowing to invest. If the market or your investments drop in value, then you won’t only be dealing with that loss - you’ll also have to repay the loan.
Although the additional market exposure has the potential to magnify returns, it also has the potential to magnify losses. In addition to this, any positive returns need to outperform the cost of borrowing, which can fluctuate with interest rates.
Changes to tax laws may have an impact on the effectiveness of your investment strategy.
FAQs
What is margin? Margin lending is a flexible line of credit that allows you to borrow against the securities you already hold in your brokerage account. When used correctly, margin loans can help you execute investment strategies by increasing your borrowing power to purchase more securities.
What is margin lending for dummies? ›
A margin loan is a loan designed specifically for investors looking to borrow money to invest in shares and managed investments. Using a margin loan to amplify your investing power can be an effective way to build wealth, diversify your portfolio and could offer tax benefits as well.
How long do you have to pay back a margin loan? ›
You pay back when you want—there's no set repayment schedule as long as you maintain the required level of equity in the account. You may repay your loan at any time by selling securities or funding the account with an electronic bank transfer, wire, or check.
Can you withdraw margin money? ›
Margin accounts are taxable, and are not considered 'registered' accounts with the government. Due to this, withdrawals are not regulated, or limited in any way.
Is margin lending safe? ›
If you can't lower your LVR, your margin lender will sell some of your investments to lower your LVR. Margin loans are a high risk investment. You can lose a lot more than you invest if things go sour.
What are the benefits of margin lending? ›
A benefit of margin lending is the opportunity it provides to increase your investment exposure. Essentially, borrowing allows you access to more funds, giving you the potential to make additional investments you may not have been able to make otherwise.
Is it worth getting a margin loan? ›
While margin loans can be useful and convenient, they are by no means risk free. Margin borrowing comes with all the hazards that accompany any type of debt — including interest payments and reduced flexibility for future income. The primary dangers of trading on margin are leverage risk and margin call risk.
Can you pay off a margin loan without selling? ›
You can access cash without having to sell your investments. Pay back your loan by depositing cash or selling securities at any time.
What is the difference between a margin loan and a normal loan? ›
Margin interest rates are typically lower than those on credit cards and unsecured personal loans. There's no set repayment schedule with a margin loan—monthly interest charges accrue to your account, and you can repay the principal at your convenience.
What is the disadvantage of margin loan? ›
Some risks associated with Margin Loans:
When the value of your portfolio drops, the value of the securities acting as collateral for your Margin Loan also drop. If this drop is significant enough, it may require you to meet a margin call or pay the loan back entirely.
If you fail to meet a margin call, your broker will sell assets from your portfolio to pay down the loan, and in some cases, may even sell securities to pay down a margin loan without contacting you first. The investment implications of possibly having to sell.
How much money can you lose on margin? ›
Understand How Margin Works
For example, let's say the stock you bought for $50 falls to $15. If you fully paid for the stock, you would lose 70 percent of your money. However, if you bought on margin, you would lose more than 100 percent of your money.
How can I double $5000 dollars? ›
How can I double $5000 dollars? One way to potentially double $5,000 is by investing it in a 401(k) account, especially if your employer matches your contributions. For example, if you invest $5,000 and your employer offers to fully match at 100%, you could start with a total of $10,000 in your account.
What is the interest rate on a margin loan? ›
US Margin Loan Rates Comparison 2
| $ 25K | $ 1.5M |
|---|
| Interactive Brokers | 6.83% | 6.28% |
| E-Trade | 13.70% | N/A |
| Fidelity | 13.08% | 9.25% |
| Schwab | 13.08% | N/A |
1 more rowIf an account loses too much money due to underperforming investments, the broker will issue a margin call, demanding that you deposit more funds or sell off some or all of the holdings in your account to pay down the margin loan.
What is an example of margin financing? ›
For example, if you had $5,000 cash in a margin-approved brokerage account, you could buy up to $10,000 worth of marginable stock: You would use your cash to buy the first $5,000 worth, and your brokerage firm would lend you another $5,000 for the rest, with the marginable stock you purchased serving as collateral.
What is the purpose of a margin loan? ›
Margin loans are a type of loan that an investor takes out from a brokerage to buy investments. An investor typically borrows from a brokerage if they don't have the cash balance in their trading account to cover the cost of a trade or investment – so, they use credit from their brokerage to cover the costs.
What is a margin in finance in simple terms? ›
Margin is the money borrowed from a broker to purchase an investment and is the difference between the total value of an investment and the loan amount. Margin trading refers to the practice of using borrowed funds from a broker to trade a financial asset, which forms the collateral for the loan from the broker.
Why would investors use margin loans? ›
You'll have more buying power
Margin investing allows you to have more assets available in your account to buy marginable securities. Your buying power consists of your money available to trade in your account, plus the amount that can be borrowed against securities held in your margin account.
