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How do margin loans work?

How do these things called margin loans work? And what is the safest way of doing them?

Margin loans really are a hot topic this week.

You can use margin loans to free up the equity you have in investments you already have, to get cash for more investments and even to supplement your super.

It means you can hold more investments and make more money but you can lose more money.

There are also tax benefits. You can claim the interest as a tax deduction and if you buy the right shares there will be tax credits to help lower your overall tax bill.

Usually the lender will have a list of investments that are approved for margin loans.

Experts say if you borrow up to 60 per cent of the value of the shares, the price has to fall a pretty long way before a margin call is made.

I reckon you should only try this with help of a financial adviser and ask what happens if the market or your shares’ prices fall by 10, 20, or 30 per cent? See when a margin call kicks in.

Generally, after four big years of a rising stock market, a fall was always on the cards and margin loan customers should be closing up their positions before the bad news hit. Margin loans are easier to live with in a rising market. Fixing your margin loan rate of interest can work to prevent interest rate slugs.

As you can see, there’s lots of homework to be done with margin loans.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

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: Tuesday, February 09, 2010

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