Margin lending
The first is called margin lending, a service offered by some banks and larger stockbroking firms. Margin lenders allow you to borrow up to an agreed value of a group of shares, although the allowable debt is unlikely to be much higher than 70% of the total value. For example, with a $30,000 portfolio already established, it’s possible that you could borrow up to a further $70,000 to invest in particular stocks.
The problem with this type of gearing, is that it is possible to lose a large proportion of your investment if something goes wrong. If the shares fall in value to below an agreed limit, then the lender will require you to deposit additional shares, or cash, to maintain the lender’s proportion of the overall value. This is the dreaded margin call. And if you haven’t got the cash, you may have to quickly sell shares after they have already fallen in price to meet the lender’s requirement. That’s why margin lenders typically only allow you to buy stable, less speculative stocks with the money you’re borrowing. To find out more about what margin lending providers offer, click here.
