Margin lending is an investment strategy that allows investors to borrow money to invest in shares, ETFs, or managed funds, using existing investments as security (or collateral) for the loan. This approach is often used by investors looking to increase their potential returns by leveraging their existing portfolio.
Remember:
While margin lending can amplify gains, it also increases the risk of amplifying losses. Whether the invested funds go up or down, the investor must still repay the investment loan, including any interest.
Investors can open a margin loan account with a financial institution or broker (the lender) such as CommSec. Once the account is set up, existing shares or managed funds can be used as security or collateral. Investors may need to deposit additional cash or investments to get started, or top up the value of their holdings if the market conditions change.
The lender will assess the investor’s portfolio to determine how much they can borrow. This is known as the "Loan-to-Value Ratio" (LVR). For example, if the LVR is 70%, the investor may borrow up to 70% of the value of their secured investments, with the remaining 30% representing their own equity (such as existing shares or managed funds).
Learn more about CommSec’s list of accepted stocks and managed funds and their individual LVR rates.
Investors can use a margin loan, combined with their own money, to purchase additional shares, ETFs, or managed funds, further increasing their exposure to the selected stocks.
If the value of investments falls and the LVR exceeds the allowed limit, investors may receive a "margin call." This means they'll need to either deposit additional funds, provide more collateral, or sell some investments to reduce the loan balance. If no action is taken, the lender may sell investments to recover the shortfall.
Interest is charged on the borrowed amount, usually at a variable rate. There may also be account-keeping and transaction fees associated with the loan.
Potential benefits of margin lending include:
Risks include:
Let’s say an investor has $100,000 invested in Australian shares. They decide to borrow $50,000 to invest in more shares through a CommSec Margin Loan. The total value of their Australian shares is now $150,000.
The Loan-to-Value Ratio (LVR) for these selected investments is 33.33% ($50,000/$150,000). CommSec allows a maximum LVR of 60% on these investments.
This investor has invested in five mining companies. This approach carries significant risk due to its lack of diversification. After a fall in the price of commodities, the value of these shares fall by $25,000 reducing the total value of these investments to $125,000. The margin loan remains at $50,000. This means the LVR has increased to 40% ($50,000/$125,000). Since this is still below the maximum allowed LVR of 60%, the investor is not required to sell any shares or make any further cash injections.
Five years later, commodity prices have risen due to short supply. The value of these investments is now $200,000. This means the investor could close the margin loan by repaying the $50,000, leaving them with $150,000 in equity. They decide it’s a good time to sell down these mining investments and diversify their share investments overseas. Learn more about diversification.
Margin lending is generally suited to experienced investors who understand the risks and have a solid financial buffer. When selecting the stocks or managed funds to leverage, it's important to carefully consider your risk tolerance, investment goals, and the possibility of having to provide extra funds at short notice.
Investors often choose not to borrow the maximum amount, or they keep some cash set aside in case they need it. This way, if the geared investments dip or fall in value, triggering a margin call, investors are less likely to be forced to sell assets.
Seeking advice from a financial adviser before embarking on a margin lending strategy is highly recommended. Learn more about CommSec Margin Loans.
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For the purpose of CommSec Margin Loans, Commonwealth Bank of Australia reserves the right to vary the list of securities and the lending ratios at any time without notice and at its total discretion. Neither the Commonwealth Bank of Australia nor any of its related entities make any recommendations (express or implied) about any securities listed above or give any guarantee as to the payment of income or repayment of capital.
1 Assumptions: The above “How does its work” example, doesn’t include dividends paid by the investments, tax implications on earnings or borrowing costs of the loan. This hypothetical example is for illustrative purposes only and is not a recommendation. No warranty is provided regarding the results shown or their underlying assumptions will be met or that capital will be repaid. When investing remember that past performance is not a reliable indication of future performance.
CommSec Margin Loans are issued by Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. This product is administered by Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec), a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia. CommSec is a Market Participant of ASX Limited and Cboe Australia Pty Limited, a Clearing Participant of ASX Clear Pty Limited and a Settlement Participant of ASX Settlement Pty Limited. Applications for CommSec Margin Loans are subject to approval. Fees and charges apply.
The information has been prepared without taking into account your objectives, financial situation or needs. For this reason, any individual should, before acting on this information, consider the appropriateness of the information, having regards to their objectives, financial situation or needs, and, if necessary, seek appropriate professional advice. You can view the Margin Loan Product Disclosure Statement, Margin Loan Terms and Conditions, Trading Terms and Conditions, Best Execution Statement and Financial Services Guide, and should consider them before making any decision about these products and services.
The Academy is intended to provide general information of an educational nature only. Any securities or prices used in the examples given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. Investing carries risk.
© Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. CommSec is a Market Participant of ASX Limited and Cboe Australia Pty Limited, a Clearing Participant of ASX Clear Pty Limited and a Settlement Participant of ASX Settlement Pty Limited.
The information on this page has been prepared without taking into account your objectives, financial situation or needs. For this reason, any individual should, before acting on this information, consider the appropriateness of the information, having regards to their objectives, financial situation or needs, and, if necessary, seek appropriate professional advice.
CommSec does not give any representation or warranty as to the accuracy, reliability or completeness of any content on this page, including any third party sourced data, nor does it accept liability for any errors or omissions.