invest@net

 

Issue No.4

Part1of3

Back to index

This article is reproduced with permission from
Normandy Advisory Services Sdn. Bhd (Licensed Investment Advisor)
15th Floor Menara Multi-Purpose, No 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur
Tel : 03 - 469 5560 Fax : 03 - 294 5561


This article is copyright and no part of it may be reproduced in any form without the prior consent of Normandy Advisory Services














Some Malaysian investors are familiar with the term 'margin financing'. It is basically the concept of geared investment which means the investor is using a loan to purchase a larger portfolio of shares than could otherwise be bought using his/her own funds alone. It is similar to a home mortgage (of which many home owners are familiar with) whereby a bank loan taken out to buy a house which is secured by the house itself.

Yet apart from the fact that in the end you are not able to live in your share portfolio, margin financing is the same idea whereby when investors buy securities on margin they buy some shares with cash and borrow from their broker to pay for additional shares using the paid shares as collateral. The shares paid for with the investors' money are like the equity on an installment purchase agreement.

Lending money to invest has become big business over the past few years. The most popular lending schemes today are for shares and unit trusts. The term "gearing" is very good description for "borrowing to invest" when the investor is on the road to wealth creation. Just like driving a car if the road is smooth and safe at high speeds you can "gear up" and get from point A to B quickly. However if the smooth road suddenly becomes rough and unsafe but you continue high speeds then you may be delayed in reaching your destination or even worse you may never get there as the car crashes.

The investor can "gear up" his or her returns and reach the desired level of wealth more quickly. However as there are no uncertainties in the investment world and the markets can turn sour very quickly the investor may not only be delayed in reaching his or her wealth goal as a result of gearing but may have his or her capital wiped out plus owe money to the lender.

Consider Mr.Investor who purchased RM16,000 worth of Telekom shares at RM16 per share. He used an initial cash outlay of RM8,800 and obtained a loan as large as RM7,200 from his brokerage firm. With RM16,000 invested in Telekom shares, Mr.Investor will have obtained a lending ratio of 45%.

NEXT PAGE