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April 28, 2011
NEW ADF INTERACTIVE
NOW DEPLOYED! www.adfcon
‹ Easy, accurate planning
‹ Battleground graphics & details
‹ Targeted at ADF personal & family finances
‹ Super-fast calculations
Who said finances are boring? This whole exercise will help all
ADF members and their families manage income and expenses,
create personal balance sheets, and understand progress towards
financial independence. Check it ou
NICK took out a margin loan
to invest in shares when the
market was up and earned
himself some decent money.
But when the market turned sour his
lender started making margin calls
almost every day.
It's a sad but cautionary tale.
One of the most common ways of
borrowing to invest is through a mar-
gin loan and the Australian Securities
and Investments Commission (ASIC)
has developed an online margin loan
calculator at www.moneysmart.gov.
au to help you assess the risks.
Nick did not have any money to
pay his lender because all his cash
was tied up in his investments.
He had put up his apartment as
security for the loan and was in dan-
ger of losing it if he did not make a
substantial repayment to his lender.
To avoid this, Nick was forced to sell
most of his investments at low prices.
The sale prices were so low that he
was still left with a substantial debt,
which continues to grow.
How margin loans work
Because share prices move fre-
quently, you are exposed to the risk
that the shares might fall in value.
To gauge the risk of your loan,
lenders use a loan to value ratio
(LVR). The LVR is the amount of
your loan divided by the total value of
your shares. Most lenders require you
to keep the LVR below a maximum of
70 per cent.
If the value of your investments
falls to a point where your loan
exceeds the maximum LVR, you will
be required to top up your investment
or repay some of the loan. This is
known as a margin call.
In order to meet a margin call and
bring the LVR back to an acceptable
level, you will have to:
Find extra cash to pay the lender.
Sell part of your investment to raise
Give the lender additional security
(e.g. security over other shares).
Managing the risks
As ADF members you know a
lot about managing risk. When you
embark on any new endeavour, it's
good to know the risks involved
so you can assess the situation and
make an informed tactical decision.
Follow these rules: you should
borrow conservatively; you should
diversify your investment; you should
pay the interest on your loan to keep
your debt under control; you should
check your loan account regularly
because the value of your investment
can change very quickly; and you
should have cash or security ready for
Margin loan interest rates and fea-
tures vary, so shop around for a lender
that best suits you.
For more information, visit ASIC's
consumer and investor website www.
moneysmart.gov.au call 1300 300
630. Email ASIC with column topics
that interest you via the feedback link
Borrowing money to invest -- also know
as gearing -- is fraught with risks, says
ASIC chairman Tony D'Aloisio.
DON'T FALL INTO
A TRAP: Don't
squander your hard-
Photo: LSIS Paul Berry,
digitally enhanced by
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