Share Margin Financing (SMF) could a great tool for wealth creation in the stock market. However, you have to be well aware about the risk you might face when enter the position.
Leverage risk
Higher returns are assured by taking greater risks, thus it could be a double-edged sword. Margin can magnify your losses just as dramatically as it can boost returns.
Higher returns are assured by taking greater risks, thus it could be a double-edged sword. Margin can magnify your losses just as dramatically as it can boost returns.
Revision the value of the collateral securities
The broker may at any time revise the value of the collateral securities after the estimation of the risk, based, for example, on market factors. If such revision of the collateral securities resulted a margin account falling below the minimum margin requirement, the broker will immediately issues a "margin call", requiring the investor to bring the margin account back into line.
The broker may at any time revise the value of the collateral securities after the estimation of the risk, based, for example, on market factors. If such revision of the collateral securities resulted a margin account falling below the minimum margin requirement, the broker will immediately issues a "margin call", requiring the investor to bring the margin account back into line.
Risk of being unable to meet a margin call
You are require maintain a specific percentage of equity in your account as specified by the broker. If margin of finance falls below the minimum equity maintenance requirement, your account may incur a margin call. This means you will need to add cash or securities to your account to increase your equity. If you do not act promptly, your brokerage firm may sell securities you own without notifying you, in order to increase the equity in your account. You are not entitled to an extension of time on a margin call.
You are require maintain a specific percentage of equity in your account as specified by the broker. If margin of finance falls below the minimum equity maintenance requirement, your account may incur a margin call. This means you will need to add cash or securities to your account to increase your equity. If you do not act promptly, your brokerage firm may sell securities you own without notifying you, in order to increase the equity in your account. You are not entitled to an extension of time on a margin call.
How to avoid a margin call
Leave cash cushion in the account
Instead of investing all the money in financial products, the investor can set aside some cash deposits to help reduce the likelihood of a margin call, position your portfolio to withstand significant fluctuations in the overall value of your collateral without falling below your minimum equity requirement
Invest in assets with significant return potential
The securities you buy on margin should, at a minimum, have the potential to earn more than the cost of interest on the loan
The securities you buy on margin should, at a minimum, have the potential to earn more than the cost of interest on the loan
Set a personal trigger point
Investors should set their own maintenance margin, which should be above the broker’s minimum required balance. Keep additional financial resources in place to contribute to your margin account when your balance approaches the margin maintenance requirement.
Investors should set their own maintenance margin, which should be above the broker’s minimum required balance. Keep additional financial resources in place to contribute to your margin account when your balance approaches the margin maintenance requirement.
Pay interest regularly
Interest charges are applied to the investor's account every month with no specific repayment schedule. The investors is advisable to make regular interest payment to avoid loan accumulation and keep the loan balance in control
Protect your capital
When the market is going against your trading/investment plan, you may consider to protect your capital by selling off some positions.
If you are interested to know more about SMF , don’t hesitate to fix an appointment with us. We’ll get back to you asap.
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