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Margin Loans Experience with a Margin Call

Discussion in 'Finance & Banking' started by jenpalex, 21st Sep, 2006.

  1. jenpalex

    jenpalex Active Member

    Joined:
    16th Aug, 2005
    Posts:
    37
    I am looking at experimenting with a small,highly geared portfolio. This would mean I would be at risk of a margin call. I wonder if any Investeders have ever had this happen to them; what happened; how did they handle it and how bad was the financial damage?

    jenpalex
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    9th Jun, 2005
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    4,623
    Location:
    Sydney, Australia
    It might be worth calling your margin lender and asking them to step you through the process.

    I haven't had a margin call - but my understanding is that they literally call you (or email, etc) and give you 24 hours (or up to 4pm the next day, or something like that, depends on the manager), to either front up with some extra security (cash, shares, funds, etc), or else they will sell enough of your holdings to bring you out of margin call.

    You would want to work out how large the margin call is likely to be (depends on how far your portfolio value drops) to calculate how much it would hurt your returns.

    There is an argument that margin calls act like a form of stop-loss, reducing your exposure in a falling market. Personally I don't think it's a great tool - if I were going to take that approach, I would rather do it on my own terms than being forced to sell out at my margin lender's whim.

    I too, would be interested to hear from anyone who has actually been through the process to help us understand how it works.
     
  3. Chris.R_WA

    Chris.R_WA Well-Known Member

    Joined:
    7th Aug, 2006
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    Location:
    Perth, WA
    Haven't been through a margin call thankfully, but my lender Suncorp have recently introduced policy whereby your margin call can now be satisfied by market correction at the end of the third business day.
    ie. If the value of your securities drops on Monday, you could wait till COB Thursday to see if the market pushed your LVR back into the acceptable range. If not, then either pay up or sell up as per usual.

    Dont forget most lenders offer a buffer above the max LVR, up to 5% on stocks and 10% with MF in my case.

    Cheers, Chris