How to minimise the risk of margin calls
Margin calls are a safety feature that lenders have added to their loans to ensure that the amount you owe doesn’t end up exceeding your portfolio value. ie it’s an early warning sign that you should reassess your portfolio to reduce your exposure and reassess your portfolio. Lenders aren’t closed to suggestions here, they just want to see your borrowing to fall below X% of the total value, if your able to add more cash, shares or managed funds as security they’ll be happy to accept this. Where most investors fall foul of a margin call is where they have borrowed to the hilt and then encounter a fall in the market. As you can imagine, since this is usually the worst time to sell out of the market, margin calls can crystallise short term losses.
How to get the best out of a margin loan and how to avoid margin calls?
Get the best interest rate
It’s easy to get carried away thinking about the maximum you can borrow and features of the loan, but at the end of the day, it is just a loan. Interest rates are one of the easiest things to compare. Using a discount broker such as Wealth Focus can save you money here since we can negotiate with your lender for reduced rates on larger loan sizes as well as rebating the commission we receive putting more money in your pocket.
Keep your overall borrowing well below the maximum
Margin calls occur when you hit the ceiling of borrowing for the overall size of your portfolio. By borrowing only 50% of your portfolio’s value, the portfolio would have to drop significantly before you are asked by your loan provider to either provide more security or sell some of your investments.
Diversify your portfolio
This sounds like common sense, but you would be surprised how many investors sit with heavy weightings in only a handful of shares. Spreading your investments across a larger number of shares or managed funds ensures that you are not at risk of a margin call just because one share plummets in value.
Appoint WF as your discount broker
Regardless of who your margin loan is with, as a discount broker, we can in most cases, offer a discount on the rate you are paying. Appointing Wealth Focus as your active adviser means that we receive any ongoing trail commission. As a discount broker with reduced ongoing costs, we are able to rebate some of the ongoing fees to enhance the interest rate you receive.