Investors, who take out margin loans and who trade to the maximum allowable by their loan to valuation ratio (LVR), can experience a certain comfort knowing they have a buffer zone, usually from 5 to 7 per cent, to protect them. Those who continuing trading into the zone however need to have cash available should they experience a sudden margin call.
Margin loans, trading in the buffer zone and margin calls are the realm of the adventurous investor and not a practice that the more conservative investor should contemplate.
The buffer zone, in relation to margin loans, is the amount that exceeds the LVR before the margin lender makes the margin call. Those who continually gear to trade in that domain should be fully aware of their margin lenders policy if the zone was to be exceeded in the event in a sudden drop in the share price, an event the investor has no control over whatsoever.
Margin loans, trading in the buffer zone and the subsequent margin call that will find you scrambling at the last moment to either sell off some of your shares or come good with a cash deposit, are all matters that will rely on your relationship with your margin lender. You must therefore be aware of what your margin lenders reaction would be should you be subjected to a margin call if your buffer zone was to be exceeded. Would your margin lender require you to restore your buffer zone to zero immediately or would he be satisfied if the buffer is simply reduced to within the margin once again.
Margin loans, trading in the buffer zone and its subsequent consequences will depend a lot on the size of the margin loan. Some investors may be forced into selling off securities that they would have preferred to keep, under different circumstances.
SMS texting warns of margin loans trading in the buffer zone.
Some banks who allow a buffer zone to exist over and above the LVR use SMS text messaging to warn their customers when their account has reached the allowable zone and a margin call is forthcoming. This practice allows the investor to reduce his or her share holding or come up with sufficient funds to put the account back into balance before any action is taken.
Many investment experts recommend that diversification is the secret to avoiding the pitfall margin loans, trading in the zone, have on the investor. In a volatile market it remains imperative that investors don't have 'all their eggs in the one basket'. Protection against margin calls can be as simple as the following tips:
Margin loan investment can then be quite a rewarding experience but many who have had their fingers burnt as a result of their margin loans, trading in the zone have been found to have been investing in just one stock, A full awareness of the importance of diversification and the soundness of responsible investing could well save the embarrassment of experiencing a margin call and the subsequent pain of selling off your portfolio before time.
A strategy best suited to the better off.
When contemplating margin lending it should be remembered that it is a better option for high income earners than it is for the lesser well off. High income earners can take better advantage of any taxation benefits. Especially in the field of gearing where any interest on the loan can be pre-paid upfront which allows for the maximum tax benefit to be enjoyed in any one year.
Investors contemplating a gearing strategy such as what margin loans offer should be:
For those on incomes of less than $80,000 the taxation benefits are of little benefit.
Margin loans, trading in the buffer zone and margin calls are the realm of the adventurous investor and not a practice that the more conservative investor should contemplate.
The buffer zone, in relation to margin loans, is the amount that exceeds the LVR before the margin lender makes the margin call. Those who continually gear to trade in that domain should be fully aware of their margin lenders policy if the zone was to be exceeded in the event in a sudden drop in the share price, an event the investor has no control over whatsoever.
Margin loans, trading in the buffer zone and the subsequent margin call that will find you scrambling at the last moment to either sell off some of your shares or come good with a cash deposit, are all matters that will rely on your relationship with your margin lender. You must therefore be aware of what your margin lenders reaction would be should you be subjected to a margin call if your buffer zone was to be exceeded. Would your margin lender require you to restore your buffer zone to zero immediately or would he be satisfied if the buffer is simply reduced to within the margin once again.
Margin loans, trading in the buffer zone and its subsequent consequences will depend a lot on the size of the margin loan. Some investors may be forced into selling off securities that they would have preferred to keep, under different circumstances.
SMS texting warns of margin loans trading in the buffer zone.
Some banks who allow a buffer zone to exist over and above the LVR use SMS text messaging to warn their customers when their account has reached the allowable zone and a margin call is forthcoming. This practice allows the investor to reduce his or her share holding or come up with sufficient funds to put the account back into balance before any action is taken.
Many investment experts recommend that diversification is the secret to avoiding the pitfall margin loans, trading in the zone, have on the investor. In a volatile market it remains imperative that investors don't have 'all their eggs in the one basket'. Protection against margin calls can be as simple as the following tips:
- Remain conservative
- Stay with the top 300 companies listed on the Stock exchange
- Diversify your share holdings with at least three or four different companies.
Margin loan investment can then be quite a rewarding experience but many who have had their fingers burnt as a result of their margin loans, trading in the zone have been found to have been investing in just one stock, A full awareness of the importance of diversification and the soundness of responsible investing could well save the embarrassment of experiencing a margin call and the subsequent pain of selling off your portfolio before time.
A strategy best suited to the better off.
When contemplating margin lending it should be remembered that it is a better option for high income earners than it is for the lesser well off. High income earners can take better advantage of any taxation benefits. Especially in the field of gearing where any interest on the loan can be pre-paid upfront which allows for the maximum tax benefit to be enjoyed in any one year.
Investors contemplating a gearing strategy such as what margin loans offer should be:
- Financially sound.
- On a high income,
- Reasonably young enough to enable them to start again should all go 'belly up'.
- Not be retired.
For those on incomes of less than $80,000 the taxation benefits are of little benefit.