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Margin Loans Getting my head around margin loans

Discussion in 'Finance & Banking' started by johnnyb, 7th May, 2007.

  1. johnnyb

    johnnyb Well-Known Member

    Joined:
    16th Aug, 2005
    Posts:
    190
    Location:
    Hobart
    Hi All,

    I've been paying more attention to my margin loan lately and am trying to understand how I can make more use of it.

    As an example, say I have:

    Shares: $200K, with a maximum gearing ration of 70%
    Margin Loan: $100K, therefore
    Gearing Ratio: 50%.
    Margin Value: $140K (based on 70% gearing ratio)
    Margin loan buffer: $40K.

    Now, say I buy $40K of another blue chip share by withdrawing from my buffer of $40K. My new position is:

    Shares: $240K
    Margin Loan: $140K
    Gearing Ratio: 58.3%.
    Margin Value: $168K
    Margin loan buffer: $28K

    Does that look right? It's doing my head in a bit. To start with I have $40K of available funds. I withdraw all of this money to buy more shares, and at the end I have a new position where I still have $28K of funds available.

    Am I doing something wrong?

    John.
     
  2. Simon

    Simon Well-Known Member

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    17th Sep, 2005
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    520
    Location:
    Newcastle
    Don't forget that the $40K of shares you have just bought adds to your security.

    So you can then borrow 70% of that which I am guessing is around $28K...
     
  3. handyandy

    handyandy Well-Known Member

    Joined:
    6th Jun, 2006
    Posts:
    312
    Location:
    Sydney Nsw
    Hi John

    Don't forget that the stated conservative lvr is 50%.

    The reason it's at this level is to ensure that you have a buffer. Say the market tanks by 30% (the stated norm) then from that initial 50% lvr you would move to 70% and not get a margin call or shares sold on you.

    eg

    $1mill + $1mill margin

    total invested $2mil

    market corrects to $1.4mil

    $1mill /$1.4mill = 71%

    Cheers
     
  4. johnnyb

    johnnyb Well-Known Member

    Joined:
    16th Aug, 2005
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    Location:
    Hobart
    I guess that's the bit that is doing my head in. The magic of using OPM!

    John.
     
  5. johnnyb

    johnnyb Well-Known Member

    Joined:
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    Posts:
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    Location:
    Hobart
    Yes, I understand that. I'm just thinking that if a bargain share came up there seems to be more funds available from the margin loan than I initially realised. That is, in my example I thought I only had $40K of buying power, when in fact even after spending that $40K there is still more money that can be accessed (assuming I use the initial $40K to buy something that can be further margined).

    John.
     
  6. DaveA

    DaveA Well-Known Member

    Joined:
    19th Feb, 2007
    Posts:
    617
    Location:
    Sydney, NSW
    youll find with a 70% purchase, you could buy $133,333 value of more shares.

    This would give you
    $333,333 Value of Shares
    $233,333 Value of Margin Loan
    69.99% LVR
    $0.10 buffer

    however if there is any market correction you would need to make a margin call, so gearing lower would be a smarter idea...
     
  7. bundy1964

    bundy1964 Well-Known Member

    Joined:
    22nd Dec, 2006
    Posts:
    351
    Location:
    Adelaide, SA
    You also have the buffer of 5 to 10% before you hit a call.

    Two crashes of note were 49% and 39% over the last 20 years in both cases the p/e ratio couldn't match the rising share price and for the tech bubble in a lot of cases there was nothing much more than ideas floated. 50% lvr wouldn't of done much to save you in either event.

    I do continue to push mine as high as I can while I am still growing till I hit X. 10% margin for error and a few things that lower the risk.

    (1) Managed funds - includes some non share investments and the bank is slow with updating prices.

    (2) Corporate Bonds, Floating Rate Notes, Convertible Notes and Hybrid Securities come with up to a 90% lvr and while they are traded on the ASX their is minimal price movements. They are proped up by the rest of my holdings in good times and when the market falls they limit the damage.

    (3) Do they make a profit and is it growing to match the rising share price? How well do I understand what they make/sell and is there a market for it?

    Pressure of money is playing it's part in helping smooth out the dips, when they start retirement the market will need to change again but the push is towards them remaining investors rather than going with a lump sum cash payout.