Margin Lending – Gear Up Now While The Risk is Low.

By Jason Fittler

"We all know that right now good quality stocks are cheap..."

 

With the collapse of companies like Storm Financial, margin loans are now considered high risk.

Anything is dangerous in the wrong hands. However, margin loans are a very effective tool when used correctly. And now is the time to be using them.

The market has fallen from its highs of 6800 in October 2007 to the lows of 3050 in March 2009. This is a drop of 55%; it is now back up around the 4000 level, as such the market has fallen 41% to date from its highs.

If you borrow at a capacity of 50% through a margin loan, you would need the market to fall a further 35% from the current levels before you got a margin call. This would put the market at 2600.

Our preferred gearing ratio is 30%, to receive a margin call at this level the market would need to see the market fall 58% from the current level before you would receive a margin call. This would put the market at 1680, which is unlikely.

We all know that right now good quality stocks are cheap, long term the market will move higher.

Do not fall into the trap of getting rid of your margin loan or being afraid to borrow in this market. The market would have to fall a long way before you received a margin loan.

Consequently, the risk of borrowing is lower then it was 2 years ago.

Like to know more? Give us a call 07 4771 4577.