Margin lending allows you to borrow some of the money your require for an investment, this allows you to take out larger investments which have to potential to lead to higher returns on your investment. When deciding if you should use margin lending to boost your investments though there are a number of factors you should consider.
So How Does a Marginal Loan Work?
The way margin lending works is that the loan you take out is secured against the shares or managed funds you invest in. For example, you could put $15,000 of your savings into an investment and then get a marginal loan for a further $15,000 doubling you investment to $30,000. You can invest with dipping into any of your own savings funds if you choose. For example, if you had equity in you home you could use the equity in your home to buy the initial stock and then take out a marginal loan to double your investment.
Who Should Do Margin Lending to Accelerate their Investments?
Margin lending is for those who have more to invest and wish to increase their exposure to the market, but you should also preferably have a high disposable income and be willing to take greater risks. You should also ensure that you have enough to meet any margin calls that may be made on you.
How to Protect Against Risks Involved with Using Margin Lending
Although margin lending can help you to accelerate your investments it also poses greater risks than simply investing your own money. To help cover these risks you should not invest all your available funds and you should spread your risk across a number of different sectors. Due to the increased risk you should also carefully consider how much you are actually going to take in margin lending so that you can accelerate your investments while still remaining reasonably safe.
How to Choose a Margin Loan
If you are new to margin lending and are currently looking for a loan, or if you are looking to renew a margin loan, how do you go about choosing the right loan? You should first look at what you want to invest in, what the loan-to-valuation and buffer margins are, how the margin is operated and what other fees are associated with the loan, and the minimum loan amount. Carefully look at all the information you are given about different margin loans and way these up carefully before deciding which loan you are going to work with.
Margin lending is useful to boost your investments as they allow you to invest more than you currently have available and so get greater returns. There is however greater risks involved with margin lending and steps should be taken to minimize these risks and your margin loan chosen carefully taking into consideration all the information you can get on the loan.
About the Author
Written by Richard Greenwood, author of the ebook ‘Finance Overhaul’, a step by step guide to financial success and freedom. http://www.financeoverhaul.com.au