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Margin loans - other investments

Discussion in 'Money Management' started by nitro-nige, 12th Feb, 2010.

  1. nitro-nige

    nitro-nige Well-Known Member

    Joined:
    8th Mar, 2007
    Posts:
    49
    Location:
    Reservoir, Melb
    Can you take out a margin loan to day trade forex, stock options etc?
    Or do the lenders and the ATO view this differently?

    (Sorry bit of a newbie question)
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    A margin loan needs to be backed by marginable assets (typically blue-chip shares or managed funds).

    If you look on the margin lenders websites they will give you a list of shares and funds that they will let you margin against.

    Margin loans are risky because the fluctuation in value of the shares/funds can see your equity disappear very quickly, forcing the margin lender to liquidate your holdings to protect yourself and leaving you with a loan to pay off and no assets to help you do it. That being said, margin loans are a great way to increase your returns if you are careful in how you use them and understand how to manage the risks.

    If you have an existing share/fund portfolio, a margin lender will happily lend you money against it - it's basically just a LOC, so you can use the money for whatever you like.

    That being said, unless you are a very experienced and successful trader - there's no way you should be borrowing to capitalise your trading ... that's a very easy way to lose a lot of money.
     
  3. Vagon

    Vagon Well-Known Member

    Joined:
    31st Mar, 2010
    Posts:
    56
    Location:
    Sydney
    I agree with Sim, leveraging highly volatile products (and possible already leveraged products) is not recommended. Try it out with small amounts of money first.

    From my own experience the returns on options are sufficient enough to make gains that leveraging is an unnecessary risk.

    That said, you can use your margin loan to purchase anything you like, the major difference from any other loan is that the collateral is managed funds or shares.

    Sim, a bit off topic, but maybe you could help me. I have a LOC on my PPOR and was wondering if it was fine to not repay the interest payments for the LOC and instead place the equivilant amount into the PPOR?

    Cheers
     
  4. wdongli

    wdongli Well-Known Member

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    31st Mar, 2010
    Posts:
    1,292
    Location:
    Perth
    Margin loan is two edges sword, which could leverage our profit if market works for us but would hit us worst if market works against us.

    I do feel before we learn the technical stuff of margin loan, we have to get our mind clear that is if we are wrong, could we sleep well in the night. Hope would be in hell if anytime we could not get good enough sleep with the margin loan.

    You could be forced to sell on the fire, which is the most effective and efficient way to burn the money, when the market against you. Don't get the margin loan first. Be very cautious if we want to get the margin loan. Be sure we would never in loss and would lose all of our shirts.