Share Margin Financing (SMF)

All this while whenever people mentioned about share margin financing, the first thing that always came into my mind was share margin is risky, very risky indeed. This was probably due to many stories of investors who took up margin financing ended up losing out their hard earned money or even worst became bankrupted came into my ears since I was small. Some even ran away to other countries to avoid paying the huge sum of borrowings leaving behind their families.

A sudden interest that came from nowhere at share margin financing struck my mind lately. Frankly speaking, I’m quite new to share margin financing. After glancing through the forum and a quick search in internet.  I made up my mind and dropped a couple of emails to few local banks and investment banks to enquire about share margin financing. Basically, banks able to provide a better package compared to investment banks in terms of benefit and restrictions. It’s understood as it’s believed that the banks have better and stronger financial support compared to investment banks.

Since the risk of using the share margin is extremely high, I intended to utilise the cash safely and conservatively. Only borrow 20-30% of my capital, this will at least provide me a certain distance away from hitting margin call. No rollover fees, as I may only use the loan to trade once in a while and do not wish to be charged because of no trading activity in a certain period. Interest rate must be as low as possible, this is for sure. Invest in company that going to pay dividends that enough to cover the interest charged from the loan.

At the end, I applied the service from Hong Leong Bank which having a promotion currently. One of the promotions is the trader can get 20% rebate on the interest charged for the first 3 months. That means for the first 3 months, the interest charged will be around 3.8% as the interest rate offered is BLR-2%. The other promotion is the rebate on the stamp duty paid if the total income generated for the first 12 months is more than 2 times the stamp duty paid. Total income is the sum of the interest charged and brokerage fees during this 12 months period.

Other details for the SMF from Hong Leong Bank are

• Interest rate is BLR – 2%, no matter how much is the borrowings amount.
• Interest rate is calculated daily and credited monthly.
•  Hong Leong Bank valuation on stocks is update every 3 – 6 months.
• No roll over fees.
• Margin of financing : 60%, margin call: 65%.
• Trading limit is up to 1.5x against shares and 2.5x against cash/FD.
• Facility limit: User defined. Stamp duty is charged at 0.5% of facility limit amount.
• Brokerage fees is 0.38% (<100k 0.18="" and="" contract="" value="">100k contract value). This rate is applicable when you trade using the loan and purchase or sell using the money or counters that you pledged for the share margin account.
• Lock in period is 12 months. Penalty is 2% of facility limit if breach. Thus, you are not allow to transfer the counters that you pledged to HLB to other banks’ share margin account for the first 12 months.
• Upfront fees: RM85
• Margin call is 65% which is lower than other banks’ offers but the interest rate and no roll over fees met my criteria.

Margin of financing stimulation:

Shares cost: 100k, loan amount: 30k (purchase stock), Bank value on stocks I purchased: 80%.

Margin of financing: 30k / [(100k*0.8) + (30k*0.8)] = 30k / 104k = 28.84%

In the event of the counters I bought dropped 50%, it will become

Margin of financing: 30k / [(50k*0.8) + (15k*0.8)] = 30k / 52k = 57.69%

 (Not yet hit margin call, but it’s approaching, and I did not included the interest charged in the calculation)

To hit margin call, the counters I bought need to drop around 56%,

Margin of financing: 30k / [(44k*0.8) + (13.2k*0.8)] = 30k / 45.8k = 65.5%

Thus, if I take 30% loan and leave out the interest charged in the calculation, the counters probably need to drop slightly more than half before margin call is raised.

Apart from that, you can pledge cash or FD instead of shares as the cash or FD will have no effect from the bank valuation in stocks. 

              Margin of financing: 30k / [(100k*0.8) + (30k*0.8)] = 30k / 124k = 24.19%

Interest charged stimulation:

Interest rate: BLR – 2% = 4.6%, loan amount: 50k

Note: Interest is calculated in daily basic and credited into outstanding loan monthly

Total interest charged is RM2396 which is equivalent to around 4.79% from my original loan amount. Additional close to 0.2% interest being charged. That is the difference between interest charged daily and annually.Dividend received from the counters bought using the loan will directly used to reduce the outstanding loan. 

Take an example if I use the loan to purchase 10 lot of Dutch Lady which is expected to pay RM1300 dividends twice annually. 

So, invest in a company that has dividend yield higher than the interest rate charged will help to reduce the outstanding amount. Dividend payment in quarter will have better reducing effect than semi annual and annual distribution. But make sure the company is a good company and has the ability to pay dividend as you expected. Of course, enter at a right price is another important element to take note. 

So, I probably will take up the share margin with a loan amount of 10% of my capital. Hahaha. My first objective is to get myself familiar with the financing and see how it goes by.