Leverage your stock portfolio with a potentially tax deductible margin loan.
PhillipCapital can link with third party margin lenders to allow you to borrow money against a portfolio of stocks and managed funds, giving you the ability to make further investments and potentially increase your returns. For some Australian clients margin loans may also be tax deductible, a topic worth discussing with your Tax Agent. However, as with all leveraged products, a margin loan can also magnify your potential losses.
Margin loans are best suited to investors who have a strong understanding of leverage and are fully aware of how a margin loan works and the risks involved. If you are not fully aware of margin lending and the risks involved, speak to one of our professional and fully licensed advisers for general advice on the product.
How margin lending works
When you buy shares on a margin loan, the provider will lend you a portion of the proceeds to fund the purchase and take your shares as security against the loan. This means that the lender can sell your shares to take back the loan if you are not able to meet a margin call.
As share prices are volatile and move frequently, you are exposed to the risk of the shares falling in value. How much leverage you are taking depends on the loan to value ratio (LVR) which is the amount of the loan divided by the total value of the shares. For example, if you have an LVR of 70%, you are borrowing 70% of the value of the shares.
Margin lending providers will have varying maximum LVR's for different stocks based on the volatility of the underlying stock price. For example, you can expect to get a higher LVR for stocks such as Commonwealth Bank (CBA) versus a more volatile stock such as Fortescue Metals (FMG).
An example of a margin loan
You currently have $100,000 invested in Stock XYZ and you decide to borrow another $50,000 to invest as you feel XYZ is cheap and that the dividend and franking credits will cover the cost of margin loan. By taking this loan, you now have $150,000 in XYZ and since you borrowed $50,000, your LVR is 33% ($50,000/$150,0000). If XYZ falls to a point where the loan value exceeds the maximum LVR, you will receive a margin call, whereby you will be required bring the LVR back to an acceptable level. To do this you can:
- Give the lender additional security, such as another stock in your portfolio
- Top up the margin loan with cash
- Sell a part of your investment to pay the cash
The risks involved with margin loans
There are a number of risks you must consider before taking out a margin loan.
- Catastrophic losses if there is a market crash, forcing you to pay more cash to service the loan or sell the stock at the worst time possible
- Receive an unexpected margin call due to the lender reducing the maximum LVR. This can happen for a number of reasons including volatility in the stock markets.
If you would like more general advice on the risks pertaining to leverage and margin loans, contact one of our professional and accredited advisers.
How to manage your margin loan risks
Be conservative with your gearing
You do not have to borrow the maximum amount against your stock. By gearing conservatively and keeping your LVR low, you can reduce the risk of forced selling at the worst possible time - when the market is bottoming.
Diversify your holdings
Diversifying your holdings by having multiple holdings across multiple industries and markets will reduce your concentration risk and reduce the likeliness of your portfolio falling in value all at the same time.
Check your loan to value ratio
Being aware of your LVR and how much risk you currently have in your portfolio is important so that you don't receive any nasty margin call surprises.
Have funds or a plan ready for a margin call
A margin call can come at any time and if you have cash or additional security ready to meet margin calls, you can reduce the risk of having to force sell any assets or to find funding at short notice.
Have a good adviser to monitor your positions
If you are unsure of how to monitor a margin loan or the risks involved. An experienced and accredited adviser monitoring your portfolio and providing general advice for you on an ongoing basis will help you keep your portfolio under control.
If you would like to more information on a margin loan and how we can help you gear your investments, contact one of our friendly, professional and accredited advisers today.