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What is a Margin Loan?

What is a Margin Loan?

A margin loan is not your typical kind of loan. It is ideal for investors who frequently keep an eye on their investments. It allows investors to borrow money to buy shares or invest and use it as a guarantee. In case you barely have the time to monitor the movement of shares then do not go for it. It is mainly intended for dedicated investors who understand how margin loans work. It is a high risk type of loan which can help you increase your returns or lose a lot of money.

How it works?

Share prices are not just unpredictable but they also move frequently, it can go high or low. Many are into it because they earn heaps from it. Here’s an example. Say you have a number of shares and you earned incredible returns, you have the desire to buy more shares but you have insufficient funds. You borrow money to produce the cash. The lender will now take the shares as security or collateral. In case you are not able to repay the loan, the lender can sell it to recover the capital.

Margin Loan Risk

Why is it risky? Share prices are highly exposed to risk. Share value may rise or fall depending on certain circumstances. How do you determine the risk of your loan? Lenders gauge it by using Loan to Value Ratio or LVR. You can calculate it by dividing the amount of loan against the value of shares. Lenders will ask you to maintain the LVR below 70%. If the value of shares drop and you have reached the maximum LVR, you will be required to repay a portion of the loan or what you call a margin call. It is necessary to meet the margin call and you can do this by raising cash to be able to pay the lender. Sell a portion of your shares or produce extra cash. If these moves fail, you may provide additional security.

Manage Margin Loan Risks

  • Do not borrow beyond the maximum amount. The market can turn sour and it is highly advised to borrow conservatively.
  • Do not use your home as security.
  • Make sure you have cash for margin calls.
  • Make regular repayments. The add-on scheme bloats the loan amount. If you cannot afford regular repayments, pay at least the interest.

Contact Australian Lending Centre to find out more about margin loans.

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Debt Consolidation Financial Planning

Buying Shares from Big Banks Paying Off Well

Buying shares is a form of investment. People do invest because of various reasons. Some do it out of concern for their future while others do it because they have extra cash and they want to put it in an investment. Setting up an investment is easier compared as before. Nowadays, you can invest online by making a phone call, which basically makes the transaction much faster.

If this is your first time investing, you have to familiarise yourself with the terminology, how it works, how you can earn from it and how much you can earn from it. Are you tired of the small interest rate of your savings deposit?  Investing in stock market is like a game where you have to bet on the market, not knowing if you are going to win or not. How do you identify which stock is profitable? Can it stand an economic crisis? The stability and profitability of a stock or share is very important. So where do you put your money?

Buying shares from big banks is paying off well. It is a profitable form of investment on which you can earn up to four times the value of your money. That is a huge difference compared from regular savings deposits which only earn 2.5% interest rate. The rates are not expected to increase in the next few years. So you cannot expect greater income from it.

Buying Shares

Buying shares is a bit risky especially if you can’t afford to lose the amount of money you have invested. The stock market’s movement is affected by the law of demand and supply, and other factors. Economic crisis can happen and anyone can be affected by it especially investors. Yes it is quite risky; you have to be careful where you put your money. Bank dividends continuously grow and it would take another recession or economic crisis for it to decrease. The stock market is quite stable; this is the reason why investors who seek for greater dividends capitalize on it rather than on bank savings.

Before you invest, make sure that you deal with full service brokers. These brokers must provide information, tailored investment plans and make recommendations. Buying shares or stocks is a little tricky for beginners; make sure you are guided by the right people who have extensive experience in this field. Always talk to your broker and discuss the price of shares before you buy or sell your shares.