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Borrowing to invest – margin loans

Friends are always telling me that they are borrowing to invest and some have margin loans. At the moment these are getting bad publicity, what do you think about these loans?

Margin loans are scary because of the fear that your bank will make a margin call on you. This means you have to throw more money into the deal, which means either selling shares or simply taking money out of your bank account to keep your lender happy.

A margin loan permits you to borrow to buy shares. Let’s say you wanted to buy $100,000 worth of shares, the bank might lend you $70,000 or 70 per cent to buy a parcel of good shares. If the share value goes up everyone is happy but if they fall in value a margin call might happen. These calls don’t usually come if the share price falls are moderate but if they’re big they can kick in.

The interest on these loans are tax deductible and that’s why lots of people give them a go. The deal cuts your tax bill and gives you a much bigger exposure to rising share markets. People who used these loans for the four years when the stock market rose over 20 per cent did really well. If they got out before the shares sell off this year, they would have had a win-win experience.

Remember the cost of investment in shares, property, artwork, etc. is tax deductible and that’s why your friends would be talking about it. However, never invest purely to reduce you tax bill. Make sure the actual investment will make money for you.

There are great books that explain the smarter investment strategies that the rich and sensible have used to build up their bank balances.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

 

Published on: Thursday, November 19, 2009

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