Beware the ramifications when leveraging shares
Published in the Daily Telegraph, May 2014 by Dale Gillham
With the share market rising to its highest levels in six years, more and more investors are borrowing to buy shares, but is this a wise way to build wealth or is it a recipe for failure?
For many investors, leveraging into the share market through borrowing can be a double-edged sword. On the one hand it has the power to dramatically increase your returns in a rising market, however it can do the opposite as your risk or losses are also magnified if the market falls.
Margin lending is one way for investors to gain greater exposure to the share market as it allows you to borrow up to 70 per cent of the value of your asset, which means if you have $30,000 in shares and/or cash you can create a portfolio of shares worth $100,000, and you receive dividends based on $100,000 invested, not $30,000.While that sounds great, it is important to look at both sides of the sword before you get too excited.
1.If your portfolio rises by 10 per cent you make $10,000 or about 33 per cent on your money.
2.If the market falls by the same amount,the opposite happens and you lose $10,000 or 33 per cent on your money. Worse still, you will have to pay interest on the loan.
Margin lenders protect their risk by
using margin calls, so if the value of the
portfolio falls below a set level they need
to add funds.The best way to ensure you
don’t get a margin call is to not borrow
more than you want to invest.
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