Margin Calls on Margin Loans

[thefirstbruce]

Just wondering how many here have margin loans...and what LVRs and gearing ratios you feel comfortable with currently.

Apparently margin loans were taken up strongly in 2003-2004, but take up this year has dropped.

I wonder what the effect will be of so many ASX shares being held on margin loans. If there is a significant pull back, some of those who are on more aggressive LVRs and gearing ratios will try to avoid margin calls by dumping stock. This will drive prices down more quickly, and generate margin calls.

 

[DaleGG]

Hi

I do NOT have a margin loan, although, I admit that this might not be the smartest thing that I have done financially.....

The reason I don't is the sheer volume and intensity of the phone calls that i received in 1987 when the market crashed and my clients were getting margin calls from their brokers every half an hour. The stress and angst they endured was not pretty!

I know the market is different now and I do consider the idea, but, 1987 still rings loudly for me....

Dale

 

[thefirstbruce]

Yes Dale, my concern is that pullbacks or bubble bursts, will be so much stronger due to the higher percentage of shares owned on margin. Once a 5% fall in share price occurs, a moderate sell off by those trying to avoid margin calls will drive prices down thus cascading into increased margin calls. This could all happen very very quickly.

 

[keithj]

Once a 5% fall in share price occurs, a moderate sell off by those trying to avoid margin calls will drive prices down thus cascading into increased margin calls. This could all happen very very quickly.

Absolutely. Margin calls feed off themselves, until value investors (& bottom pickers) can't resist the bargains. They say the share market goes up the stairs & down by the elevator - margin calls are partly the reason.

My view of the market is that it's around fair value, so there's probably another 20-40% of upside left in it before the 'correction'.

I have a margin loan, but am conservatively geared (currently < 30%) and I also sleep v. well at night.

 

[Kenny]

Hello,

With any geared investment strategy, I guess it's important to weigh up the risks both from a financial point of view as well as from a psychological one.

Where the market turns adversely and the gearing ratio triggers a margin call, there are other options rather than doing a fire sale of your holdings.

One can place more collateral into the portfolio either in the form of more shares/managed fund units (that have a LVR rating with the margin lender) or place more funds into the attached cash management account (which would have a 100% LVR).

Doing either would resolve the margin call and give you time to make a considered decision on what to do about the change in your stock/fund values.

Sticking predominantly to stocks/funds which have a high LVR would also reduce the risk of a margin call.

Regards,

Kenny

 

[Ray Brown]

Hi all,

I'm about to wade into a share fund and I feel that a 50% margin loan is about right for me. I don't really know why , it just seems to be adequate protection. I will, however, be funding the shares by increasing the LVR on my 3 x house property empire from 52% to 60%.

I feel up to 75% LVR is OK on my property simply because I believe residential property to be a much larger bunch of capital (outvalues the stock market 20:1 in Oz ? dodgy figures?), characterised by homeowners very resistant to huge falls. Not immune from huge falls of course, I have read on this forum about real estate in a town in the US somewhere that had such a fall that they couldn't give away the houses. Was it Baltimore or somewhere starting with B? yikes

Hi Dale GG, any idea how heavily geared these clients in '87 were? I'm hoping they were 'up to thier eyballs' in debt (was that a quote from P Costello?) before they got the margin calls.

And thefirstbruce,

I wonder what the effect will be of so many ASX shares being held on margin loans.

so many? Are there more now than previously?

ciao

 

[thefirstbruce]

Yes Kenny, many will choose other options to dumping stock, but a significant % will still sell to avoid exposure to a further run of selling by others- human nature..

Ray, the banks have reported massive surges in margin loans in the last 3 years, therefore I infer there is higher ownership on margin.

 

[Kenny]

Hi the firstbruce,

I suspect you'll be right, human nature being what it is. The more volatile stocks and those on a lower LVR will be the most affected first.

Ray Brown,

A simple way of looking at may be why you have chosen a 50% LVR is that you have decided that allowing for a 20% fall in the market before margin call is an acceptable buffer.

regards,

Kenny

 

[NigelW]

Hi all,

I'm about to wade into a share fund and I feel that a 50% margin loan is about right for me. I don't really know why , it just seems to be adequate protection. I will, however, be funding the shares by increasing the LVR on my 3 x house property empire from 52% to 60%.

I feel up to 75% LVR is OK on my property simply because I believe residential property to be a much larger bunch of capital (outvalues the stock market 20:1 in Oz ? dodgy figures?), characterised by homeowners very resistant to huge falls. Not immune from huge falls of course, I have read on this forum about real estate in a town in the US somewhere that had such a fall that they couldn't give away the houses. Was it Baltimore or somewhere starting with B? yikes

Hi Dale GG, any idea how heavily geared these clients in '87 were? I'm hoping they were 'up to thier eyballs' in debt (was that a quote from P Costello?) before they got the margin calls.

And thefirstbruce,
so many? Are there more now than previously?

ciao

You should spreadsheet how much the margin call will be in different gearing and market drop scenarios and figure out where your comfort level is by playing with the variables.

Cheers
Nigel.

 

[Ray Brown]

hi kenny,

A simple way of looking at may be why you have chosen a 50% LVR is that you have decided that allowing for a 20% fall in the market before margin call is an acceptable buffer.

OK, you say it's simple but i'm simpler. What is the maths behind '20% fall in market' (say ASX 200) to get your margin call? And I'm thinking of a fund anyway so the fund would have to fall in value 20%.

e.g. 100K invested in fund. 50K is margin loan. LVR 50%.

6mths later, fund value 80K, still owe 50K. LVR now 62%.

When is a margin call made? 70%? 80%?

ciao

 

[Ebbie]

A simple way of looking at may be why you have chosen a 50% LVR is that you have decided that allowing for a 20% fall in the market before margin call is an acceptable buffer.

Is that right? 20% isn't much. Correct me if I'm wrong but I'm sure Steve N said in a previous thread he chooses a 50% margin to allow for a 40% market drop?

 

[Sunfish]

It was cascading automatic stoplosses blamed for the rapid fall on Wall St in '87.

By comparison it took a few years for the Dow to reach it's ultimate low after '29.

The share market is only a little more vulnerable than the housing market IMO.

Thommo

 

[willair]

The smaller the growth company,the greater the high potential setbacks..
but a 40% drop i dont know may that have that atitude to risk.
good luck
willair..

 

[House_Keeper]

I have a margin loan, and I am geared at 50% into managed funds that have an LVR of 70%. So it would take a market drop of 40% to trigger a margin call.

Additionally, I have funds available in a line of credit in case of a margin call.

It took me a few years to get comfortable with this scenario. In the end, it depends on your attitude towards risk.

Cheers,

 

[Aceyducey]

Frankly I don't believe we're into a full-blown share boom at this time.

The market has trended up in a controllable way.

I also don't believe that 'everyman' and 'everywoman' have yet mortgaged themselves to the teeth to buy shares on margin.

Hence no bubble, no bursting.

I agree with the possibility of another 40% upside from current value in the current market trend.....over time.

Of course, international events may always affect this

Cheers,

Aceyducey

 

[Andrew_A]

Acey, my thoughts are similar. I don't seen any bubble in Australian equities.

I can see the value in being in resource and commodities but not because I think the WAWKI is about to end (thanks for that acronym Thommo).

Bring on 4500 in the ASX!

 

[Sunfish]

(thanks for that acronym Thommo).

You're welcome

ps My margin a/c has a zero bal. Used to use it but they don't help trader's much. You can't trade on-line with Leveraged Equities and phone trading is slower and dearer. I think I'll reduce my trading and do more "investing" in which case I'll keep less than 10% extra buffer. I am active tho and do keep a good eye on things.

Thommo

 

[Lotana]

You're welcome

ps My margin a/c has a zero bal. Used to use it but they don't help trader's much. You can't trade on-line with Leveraged Equities and phone trading is slower and dearer. I think I'll reduce my trading and do more "investing" in which case I'll keep less than 10% extra buffer. I am active tho and do keep a good eye on things.

Thommo

Thommo,

I use ANZ margin lending with E*Trade. This combination gives me a straight-through approval of orders. I maintain a total gearing level of share portfolio at about 80%, composed of 60% through the margin lending facility and 20% through a facility secured by residential property. This allows me to maintain high LVR but avoid margin calls until the market drops by 45%. To elaborate on investment strategy, I only buy top asx 300 companies with good yields and reasonable growth prospects.

Lotana

 

[Sunfish]

Thommo,

I use ANZ margin lending with E*Trade. This combination gives me a straight-through approval of orders. I maintain a total gearing level of share portfolio at about 80%, composed of 60% through the margin lending facility and 20% through a facility secured by residential property. This allows me to maintain high LVR but avoid margin calls until the market drops by 45%. To elaborate on investment strategy, I only buy top asx 300 companies with good yields and reasonable growth prospects.

Lotana

That looks good Lotana and I've considered going the ANZ/eTrade way but I trade with Commsec pro which, while clunky, is pretty good and FREE. Neither eTrade nor Commsec offer margin on JBM tho and that is one of my favourites. Hourses for courses.

Thommo

 

[Ebbie]

A silly but related question about margin loans:

If you had $200K worth of shares and took out a 50% margin loan does this mean you are borrowing a further $200K (with new TOTAL share portfolio of $400K), LVR of 50%.

It doesn't mean 50% of your $200K, or borrowing a further $100k for new TOTAL share portfolio of $300K does it?

Making sure I understand correctly.....