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how do people deal with margin calls?

Discussion in 'Shares' started by transit, 13th Oct, 2008.

  1. transit

    transit Well-Known Member

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    How do people deal with margin calls?
    do you sell off shares or do you deposit cash into your margin loan to increase your LVR / DSR and get you out of the buffer?
    Some may argue this is throwing good money after bad but then you could also argue that you don't want to realise the loss and can afford to hold on for the next 2-3 years :confused:
     
  2. Young Gun

    Young Gun Guest

    I'd do the following in order of prefference for a margin call:

    1) Add capital to the fund i.e. buy more shares/units
    2) Reduce the margin loan
    3) Sell shares (only if I couldn't afford to do 1 or 2)

    buying more shares requires more capital to reduce a LVR than reducing the margin loan. So if was strapped for cash I reduce the margin loan as its the most efficent way to reduce a margin call.

    for a long term investor selling shares should be the absolute last option
     
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Just to expand on these comments by Young Gun - there are two issues here:

    1) as YG mentioned - adding capital to the fund gets you less of an impact in LVR reduction than paying off the loan does (ie. if you are at an LVR or 70%, then buying more units will get you only around 70% of the benefit that paying down the loan will).

    2) the flip side to this (and why the option to buy more units is still the #1 preference if you can afford it) ... is that the additional units you buy should give you greater long term returns when the market recovers.

    It comes down to how much cash you have available and what you think the market will do.
     
  4. transit

    transit Well-Known Member

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    excellent reply Young Gun, thanks.

     
  5. Redwing

    Redwing Well-Known Member

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    Just received a Margin Call on the Navra Fund today (tues)

    And I here I was, I thought I'd scraped through unscathed as they went to cash, turns out it takes a few days for them to sort the Margin Calls; Fund went to cash Fri, Margin call came in today...and yesterday I'd sent off a chq to purchase additional funds

    ouch... :D

    [​IMG]
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Did they actually expect you to fork out any more cash given that you have already added funds to the investment ? Or is your LVR still over the limit despite this most recent investment ?
     
  7. crc_error

    crc_error The Rule of 72

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    since Navra is 100% in cash, I would simply sell down units in the fund. Buying more units will simply average you into cash?

    Buying more units to average into managed funds or shares is applicable when share holdings are low, and once the shares recover, you enjoy a larger profit on your latest purchase.
     
  8. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    If you had no other choice, then selling units is an option - but I wouldn't assume that the best course of action is to sell if there are other possibilities ... no point realising a loss when there is upside potential still when the fund moves out of cash.
     
  9. Redwing

    Redwing Well-Known Member

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    Hi Sim,

    I'm presuming that it will take a few days (or longer depending on Fund Manager, Banks etc) for the chq to clear and become units, I'll be sorting out things with the Margin Lender (Suncorp) in the morn and will query the fact though if it helps

    CRC,

    I dont expect them to stay in cash for too long......we'll see though, who knows which way the investing wind blows, it will be interesting to see how it all comes out when the storm settles:cool:
     
  10. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Although I've never actually dealt with Suncorp, I have found with other margin lenders that they are generally happy to look at all the options - and the fact that you have already started the transaction should serve you well (better than starting tomorrow once you've actually spoken to them).

    Don't let them insist you fork out cash without first considering that investment that is still in process (although if it is not enough to make a difference, then there's not much you can do).
     
  11. MrDarcy

    MrDarcy Well-Known Member

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    I have found a good way to deal with margin calls with Suncorp. As they have a CMA, I pay cash (ie borrowed from a LOC) into the CMA. This has an allowed LVR of 100% of course.

    I plan to keep the cash in there until such time as security picks up in value and it is no longer required (one day...)

    This way I never actually pay down the margin loan. If you did pay the loan and at some time wanted to re-draw the funds, the interest would only be deductible if used for investment. Putting this cash back in your home loan or private accounts would not be good.

    Of course redrawing from LOC to put into CMA is tax deductible interest as it used for producing an income.

    You do have to instruct Suncorp not to "sweep" the CMA, by default they move all cash in your CMA into the loan and that stuffs the whole plan. Only takes a quick fax.

    I can't do this with BT, they do not operate the CMA and all deposits are applied to the loan.
     
  12. crc_error

    crc_error The Rule of 72

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    Actually I would say realising a loss could be a good thing. That way the loss can be used to offset capital gains in the future.

    Since you plan on holding Nava for a long time, any new capital gains this fund makes on the unit price will be locked away until you sell.

    What I'm saying is if you plan to average your way into Nava when its in cash, the exercise is pointless. So if you are margin called, your probably better selling down some units up until they move back into stock where you can re-buy units if you so wish.