Borrowing To Buy Shares
With all the wealth generated by the partial Telstra float late last year and investors looking at returns of less than 5% on cash management and term deposits there is unprecedented interest in the general community in seeing what more rewarding opportunities lie in the share market. This interest is reaching fever pitch with news of the impending AMP and NSW TAB floats.
Whilst we all would love to take our chances for a share of the predicted spoils, not only in these companies but on the market as a whole, unfortunately not all of us have the cash available but there are other alternatives.
Potential investors now have the option to borrow to purchase shares through not only home equity type facilities but also specially designed facilities known as margin loans and protected equity loans.
Margin loans are facilities whereby an investor can borrower up to an agreed percentage of the value of the shares they wish to purchase. This is usually between 40% and 70% together with a buffer margin and at interest rates around 8%. Should the value of the shares fall beneath the buffer/loan limit then the call option comes into play whereby the borrower must restore the loan back to the agreed terms. This can be done by repaying part of the loan, providing additional security, or selling some of the shares. As such you need to be aware that whilst borrowing money to increase your investment may increase the returns and rewards, it may also increase the potential for exposure to unprofitable investments or outright losses.
For those with little in the way of assets or equity to start with and are cautious investors who still want to enter the market then a protected equity facility would be worth considering. Protected equity loans transfer the risk of loss from the borrower to the lender so that if their investment takes a dive the investor can virtually walk away without fear of personal recourse for any resultant shortfall. Of course this level of protection comes at a price and interest rates for this type of facility range from 11% to 28% depending on the level of protection required and the make up of the portfolio.
With the concept of long term investment strategies in the share market now more widely accepted in the general public as a viable option for wealth creation, the use of facilities such as margin and protected equity loans to achieve these goals will also become more commonly used tools.