Leveraging on Share Margin Financing

Share Margin Financing (SMF) isn’t a term you’d hear on a daily basis. This facility can, however, improve your financial standing when used correctly.

SMF is a type of revolving credit facility that’s provided to investors, allowing them to finance their share trading and investment activities. With it, one can buy shares on borrowed money, secured by one’s collateral of choice. I myself started using this facility since Oct 2013.

Why do I used this Share Margin Financing (SMF)?

The main purpose for me to use this SMF facility is to maximize my investment return. I wish to used Other People Money to generate more return, which is called leverage. In the past, we know that only property can used OPM for leverage. In the recent year, SMF become more and more viable.

For example, if I would like to earn a passive income through dividen income from share, I have to used my own cash. If I have RM20,000 and invest into a stock with 6% dividen yield, my yearly Dividen will be RM20,000 x 6% = RM 1,200.
That means I will be receiving averagely RM100 per month.

If I able to used margin account with another RM20,000, that means I will have total of RM40,000 to generate my 6% dividen which will translate into RM2,400 per year. Isn't it great? Of course there will be interest rate cost that will be discussed in the later part of the article.

For this facility, we will requires to deposit either cash of share to the account in order to have the Margin Multiple.

Example of Margin multiple is as follows:
There is a multiplier on the value of the pledged collateral which defines the maximum amount of financing available.
E.g.: A bank provides 2.5x financing for pledged FD.
So by pledging a FD of RM20,000 you would get:
Available trading limit = RM20,000 x 2.5 = RM50,000

Interest Rate:

Interest is computed on a daily rest basis based on the end-day balance of the account. This daily interest is accumulated and is due and debited into the client's account at the end of the calendar month. If you are not using any of the amount, there will be no interest charged.

What will be the Risk?

The key risks associated with Margin Financing include the following. It is important to note that the list of risks is not exhaustive. An investor trading on margin can lose more than the initial capital.

a) Increasing interest rate

Interest Cost on margin loan might erode the gains made on Margined Securities. In a rising interest rate environment, the interest rate on the margin loans will head higher, adding to the interest load for the investors engage in margin trading.

b) Market crash causing margin call

When the share market crash, that means your share price is dropping and your initial share value collateral value will decrease as well. You probably need to top up cash during market crash in order to avoid force sell.

What will be my Strategy to use this SMF?

As mentioned, I have SMF since 2013 and below is the result for the share investing. I only used the margin to buy those companies that are paying dividen yields. With the dividen that pay out, I will be able to pay for the cost of borrowing as well. Below is the overall result that you can see how to utilize the SMF to maximize your return.

Conclusion:

Since Share Margin Financing can increases your purchasing power and allows you to use someone else's money to increase financial leverage. Margin trading confers a higher profit potential than traditional trading but also greater risks. Do consult with your financial advisor before engaging to this facility.