Improving margins for success

The increasing popularity of share market trading in Australia has fuelled the growth of margin loans, according to new figures, which revealed that investors are taking out more and larger margin loans than ever before.

The average margin loan size increased from $159,000 to $194,000 in the 12 months to last July and is expected to hit the $200,000 bracket before long, according to Cannex financial analyst Mamta Grewal.

“Investors chasing healthy returns may well be turning their backs on buying property, as the share market offers a better deal,” Grewal said.

And plenty of Australians are opting to enter the share market over property market as entry costs can be lower, the liquidity of shares makes existing easier and gains can be made in a shorter turnaround time. As a result, more investors are taking up margin loans, which allow investors to borrow cash against the value of listed shares or units in managed funds.

Margin lending schemes typically require investors to maintain a predetermined minimum equity ratio within the loan, and should that investor’s equity fall below the agreed level, a margin call is made, which requires the investor to restore the loan to the minimum ratio.

Grewal urged investors to protect against a market nosedive by gearing to minimise the risk of a margin call.

“Ask yourself what your exposure is to margin calls and how would another interest rate rise hurt your level of return. It may well be that you need to diversify your investments,” Grewal said.

Twelve institutions offer margin loans in Australia, according to Cannex, which awarded Colonial Margin Lending, Leveraged Equities, Macquarie Bank and St George Margin Lending with five-star ratings.