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Confused on Margin lending

Discussion in 'Shares' started by leet_2k, 26th Jul, 2011.

  1. leet_2k

    leet_2k New Member

    Joined:
    25th Jul, 2011
    Posts:
    1
    Location:
    Sydney, NSW
    Hi all,
    I have been reading quite a bit on Margin lending. I have been reading this article Margin Lending Explained - Andrew Page - Yahoo!7 Money Matters which confused me. I'll summarise it as follows:

    Lets say BHP has LVR of 70% .If you purchase $10,000 worth of BHP, the lender will contribute a maximum of $7,000 - which is 70% of the total cost
    Now if BHP shares rise to a value of $12,000 few questions and scenarios:

    1. The extra $2000, is that mine or is that the banks?
    2. With 70% Lending ratio. the lending value is $8400. Now the article says, since the loan is $7000, I can draw $1400 in cash OR reinvest this $1400 into new shares. What confused me is, the author says, that after he buys JST shares with a lending ratio of 60% (which equates to $3500 of TOTAL value), the loan will increase by the total amount. Is that right? I thought that $1400 is "my" money. Therefore, the loan is $9100 ($7000 + $2100 - for JST shares) and not $10500 ($7000 + $3500). Can someone please explain this?

    Your help is much appreciated.
    Thanks,
    leet_2k
     
  2. jrc77

    jrc77 Well-Known Member

    Joined:
    26th May, 2008
    Posts:
    147
    The $2000 extra equity is "yours" - however to get to it you have to either sell the BHP shares, or increase the size of your margin loan (to do cash withdrawel). Of course if the BHP shares had dropped you would also bear the loss.

    As you are not selling the BHP shares to access the extra equity, you are borrowing the full value of the JST shares - just some of it is secured against the equity you have in the BHP shares.

    Hope this helps,

    Jason
     
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    9th Jun, 2005
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    Location:
    Sydney, Australia