Risks of margin lending - Investments & advice

Risks of margin lending

Understanding the risk of margin lending

Any investment involves some risks. You should understand the risks before you invest.

We recommend that you research and understand your options, before taking out a margin loan. We also recommend that you discuss these risks with a broker or financial adviser before making an informed decision. Some of the risks that you should consider include:

a margin loan can increase your gains, but it can also increase your investment risk. Market volatility that results in a decline in the market value of your investments may require you to do one or all of the following:
- repay part or all of your loan by depositing funds into your loan account
- lodge additional acceptable securities
- sell part or all of your portfolio and use the proceeds to repay the loan balance due.
your investment may be less profitable if interest rates rise in the future
if your portfolio is in a margin call, a margin loan provider can sell your securities without contacting you. Whilst we will endeavour to always contact you or your advisor first, there may be instances where this is not possible. Some investors mistakenly believe that a margin loan provider must contact them for a margin call to be valid, and that the lender cannot liquidate securities in their accounts to meet the call unless the lender has contacted them first. This is not the case.
a margin call must be met within 24 hours. You are not entitled to an extension of time on a margin call.

Managing the risks of margin lending

Any investment strategy involves some risk. You should understand the risks before you invest. Once you have decided to invest, a number of simple risk management strategies can help you get the most out of your ANZ Margin Loan.

Invest in good quality shares and managed funds
This can reduce the chances of a margin call or substantial capital losses. A professional adviser can guide you on selecting investments to suit your needs.

Take a long term approach
Having a long term strategy and expecting dips and troughs in the market is all part of a sound investment strategy. If you have invested in good quality shares and managed funds, your investments should retain their value in the long term.

Average into the market
Buying gradually into the market over a period of one to two years can provide the benefits of ‘dollar cost averaging’. You will reduce the risk of buying into the market at a peak and this strategy can assist in smoothing the average purchase price paid for particular investments.

Diversify your investments
Investing across different sectors and having a broad range of shares and managed funds will lessen the impact on your overall portfolio if one of your holdings performs poorly.

Borrow less than your total security value
Simply because you can borrow up to 75% of your portfolio does not mean you should actually borrow the maximum amount. Keeping the gearing ratio below the maximum can be a smart strategy, because it gives you an additional cushion to reduce the chance of a margin call. This will put you in a better position to weather significant falls in the value of your portfolio.

Reinvest dividends and distributions
When your dividends and distributions are allocated, take the time to reinvest them in additional equities or use the funds to offset the loan balance. Over time, this can help reduce your gearing level and increase your security value.

Maintain a reserve of cash or shares, to assist if a margin call occurs
Often some investors opt to hold a reserve of cash outside their margin loan facility. This ‘rainy day’ strategy enables investors to move quickly and without stress, if their margin loan falls into margin call.

Monitor
Reviewing your portfolio value, security value and loan balance on a regular basis can significantly reduce the risk. Monitoring will enable you to make informed decisions and will enable you to make the most of market opportunities.

Important information

Leveraging a portfolio is fast becoming a popular wealth creation strategy. However, you should be aware that while leveraging into investments increases the potential return on investments, it is important to recognise that it can also multiply the effects of falls in share market values. We therefore strongly advise you talk to your financial planner and/or stockbroker and ensure you understand the risks, the specific tax implications, as well as the legal and financial ramifications of a margin lending facility.

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