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What happens in a margin call?

25 May 2016 |Loan management
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What happens in a margin call?

25 May 2016 |Loan management

A margin call occurs when the total amount owing exceeds the lending value by an amount greater than the Buffer. Active management of your facility can reduce the likelihood of a margin call occurring.

Margin call example

In this example, you have contributed $20,000 cash and taken out a loan of $40,000. This gives you a total of $60,000 to invest, so you purchase $10,000 of Share A and $50,000 of Managed Fund B.

  Share A Managed fund B Total
Market Value $10,000 (5,000 shares at current price of $2.00) $50,000 (10,000 units at current price of $5.00) $51,000
Lending ratio 50% 70%  
Loan (maximum amount you can borrow given the lending ratio $5,000 $35,000 $40,000
Funds you contribute $5,000 $15,000 $20,000

Assume the market value of the items in your secured portfolio decreases by 15%. In this case the total amount owing ($40,000) exceeds the lending value ($34,000) by $6,000. This is greater than the buffer of $5,100, therefore a margin call has occurred.

  Share A Managed fund B Total
Market value (15%) $8,500 $42,500 $51,000
Lending ratio 50% 70%  
Lending value (market value x Lending Ratio) $4,250 $29,750 $34,000
Percentage Buffer 10% 10%  
Buffer (percentage Buffer x market value) $850 $4,250 $5,100

It is strongly recommended that you:

  • Take action if you believe a margin call appears likely to occur.
  • Ensure your contact details remain current.
  • Seek financial advice before making decisions regarding your facility.

There are a number of ways to meet a margin call, including:

  • Reducing the total amount owing by using other funds to repay borrowed money.
  • Adding to the secured portfolio to increase the lending value.
  • Selling part of the secured portfolio with the net sale proceed to reducing the total amount owing.
This information is correct as at 25 May 2016.

Gearing involves risk. It can magnify your returns; however, it may also magnify your losses. Issued by Leveraged Equities Limited (ABN 26 051 629 282 AFSL 360118) as Lender and as a subsidiary of Bendigo and Adelaide Bank Limited (ABN 11 068 049 178 AFSL 237879). Information is general advice only and does not take into account your personal objectives, financial situation or needs. The views of the author may not represent the views of the broader Bendigo and Adelaide Bank Group of companies (“the Group”). This information must not be relied upon as a substitute for financial planning, legal, tax or other professional advice. You should consider whether or not the product is appropriate for you, read the relevant PDS and product guide available at www.leveraged.com.au, and consider seeking professional investment advice. Not suitable for a self-managed superannuation fund.

Examples are for illustration only and are not intended as recommendations and may not reflect actual outcomes. Past performance is not an indication of future performance. The information provided in this document has not been verified and may be subject to change. It is given in good faith and has been derived from sources believed to be accurate. Accordingly no representation or warranty, express or implied is made as to the fairness, accuracy, completeness or correction of the information and opinions contained in this article. To the maximum extent permitted by law, no entity in the Group, its agents or officers shall be liable for any loss or damage arising from the reliance upon, or use of the information contained in this article.

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