Australian (ASX) Stock Market Forum

# Why use margin lending?

#### Belikewater

apologies if this question seams stupid as i am very green but i am failing to see any benefits of margin lending over a cash account, i know its ment to give you access to more buying power but your losses still have to be accounted for regardless? how does it give you an edge?

for example if you had \$25000 and had another \$75000 on margin with a total of \$100000 and your position size was between 1-5% how does this differ to simply trading with a \$25000 cash account and trading with \$1000-\$5000?

this is in regards to active trading, thanks

#### Gringotts Bank

By using margin, you can take more and/or larger positions (ie. have more exposure).

So obviously to use leverage you need a consistently profitable process/system with low draw downs. Yes, the size of the losing trades is magnified, but the same goes for the winners, therefore the difference between the two (ie. your profit) is greater also.

When starting out, no point using it.

#### Roller_1

i believe Correctly used with fixed fractional position sizing ie 1% risk per trade. It just allows you to hold more positions like GB said. but you don't risk 1% of your total buying power on each trade in this case 1% of \$100,000 = \$1000, you still base your risk on your actual cash balance 1% of \$25000 = \$250.

So if you want to risk \$250 you might need to buy \$5000-\$10,000 work of stock, which without leverage you wont be able to hold many positions

#### Belikewater

Thanks for the helpful posts they clear things up abit as I think I was confused about a few things, to clarify position sizing =/= risk?

#### Roller_1

clarify position sizing =/= risk?
Not really sure what you mean but say for example

you want to buy XYZ at \$5 and have a stop at \$4.90 using 1% of \$25,000 = \$250

Meaning if you gett stopped out at \$4.90 you will lose \$250 from your account.

(Acc balance* Risk)/(entry price - stop price) = Shares to buy

(25,000*1%)/(\$5-\$4.90) = 2500 shares of XYZ

2500*\$5 = \$12,500 Worth of stock - so using a tight stop like in this example you could only hold 2 positions.

I think people in other threads try to limit a single position to a certain amount of % of their portfolio - but this example gives you an idea.

Ps. i hope the above is correct, although i am sure someone will say if it's not.

#### poverty

I'm not a trader, I'm an investor. I use margin lending because westpac are charging 4.7% fixed interest and the ASX pays out that in dividends, plus franking credits, plus you can claim the interest expense on tax. It allows me to have more exposure to the market which will go up in the long term and make me more gains.

#### Value Collector

##### Have courage, and be kind.
I'm not a trader, I'm an investor. I use margin lending because westpac are charging 4.7% fixed interest and the ASX pays out that in dividends, plus franking credits, plus you can claim the interest expense on tax. It allows me to have more exposure to the market which will go up in the long term and make me more gains.
Sounds good in theory,

Offcourse you would have to balance the benefits of the potential extra returns, against the risk of the potential increase of loss.

eg, if there was a big down turn in the market that caused you to become a forced seller at a lower level, you might turn a temporary 25% paper loss, into a 90%.

if your portfolio was 30% your equity and 70% margin loan, and it dropped 25% and was margin called, it would wipe out almost all of your equity and you wouldn't have the portfolio any more to participate in the upside.

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lesson is, don't push your margin loan to its limit LVR's

#### poverty

Sounds good in theory,

Offcourse you would have to balance the benefits of the potential extra returns, against the risk of the potential increase of loss.

eg, if there was a big down turn in the market that caused you to become a forced seller at a lower level, you might turn a temporary 25% paper loss, into a 90%.

if your portfolio was 30% your equity and 70% margin loan, and it dropped 25% and was margin called, it would wipe out almost all of your equity and you wouldn't have the portfolio any more to participate in the upside.

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lesson is, don't push your margin loan to its limit LVR's
^^ This is all true and I'm well aware of the risks involved. I think the key thing is to have enough disposable income to keep your LVR heading south inbetween equity purchases. I pay a chunk off my margin loan each fortnight when I get paid, as well as excess dividends that aren't needed to cover the interest cost.
I'm pretty confident as long as I remain in my current employment I can ride out any storm.

#### Value Collector

##### Have courage, and be kind.
^^ This is all true and I'm well aware of the risks involved. I think the key thing is to have enough disposable income to keep your LVR heading south inbetween equity purchases. I pay a chunk off my margin loan each fortnight when I get paid, as well as excess dividends that aren't needed to cover the interest cost.
I'm pretty confident as long as I remain in my current employment I can ride out any storm.
Yes, I think you should always have yourself set up so that you can absorb a 25% fall without having to be a forced seller.

You never know when a black swan event will happen, and the banks aren't always going to want to wait until you next dividend payment, you can bet the market will fall more than 25% once every 20years or so, and you never know which year that will be, if you are always levered to the max, you may eventually blow up.

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I use leverage in my portfolio, and have at times pushed my leverage to the upper limit, you just don't ever want to get comfortable and sit on that upper limit.