Margin Borrowing

Borrowing on margin involves cash borrowing from a broker to invest in securities which can be used as collaterals. It can potentially provide you with up to 2 times the buying power of a traditional cash upfront account. Investing through margin borrowing can magnify both profit and loss made on investment.

The example below shows how margin borrowing magnifies the profit and loss as compared with a cash upfront account and a collateral account. In this example, only RM 30,000 of equity is used for all the account types.

(i) Stock price drops to RM 2.50 on T+7

Investors with collateral account have to sell the Stock A, as money (RM 30,000) in the trading account is insufficient to pick up the share on T+7. RM 10,000 of loss will be incurred instantly. However, both cash upfront account and margin account allows investors to hold Stock A beyond T+7 until the share price reaches their desired price.

(ii) Stock price rises to RM 3.50 on T+10

Margin account can twice the profit earned by cash upfront account as shown in the figure above. Collateral account experiences the loss instead of grabbing this opportunity, as Stock A has to be sold on T+7 when the share price was RM 2.50.

Cash upfront account VS Collateral account VS Margin account

A cash upfront account enables investors to trade stocks based on the cash that is deposited into the trading account. When buying securities through a cash account, the investor must deposit cash to settle the trade or sell the existing position on the same trading day for the sale proceeds to settle the buy order.  This account is fairly straightforward and suitable for investors who are more conservative.

A collateral account provides investors up to 3 times cash deposited and 2 times shares of trading limit. The length of settlement days for the outstanding shares is typically 3 to 7 days. If investors wish to hold the shares more than the settlement days, more cash has to be deposited into the trading account until the cash in the trading account is enough to pick up the outstanding shares. Interest is charged on the outstanding shares starting from T+4.

On the other hand, a margin account allows investors to borrow cash from a broker to increase their securities buying power by as much as 50%. It also exposes investors to more opportunities like short selling which are not valid to both accounts above. This allows investors to use margin to leverage their position and profit from both bullish and bearish market. A margin account can be very cost effective, as the outstanding purchase is subject to a daily interest rate charged by the broker. No interest will be incurred if no outstanding position is available in the trading account.

Open Margin Account

With proper risk management techniques, margin can significantly enhance your investment strategy to maximize the profit margin from your investment.

To Begin investing utilizing margin:

• STEP 1: Make sure you understand the risks and benefits of using margin.
• STEP 2: Have at least RM 30,000 of assets.
• STEP 3: Sign up for a margin account
• STEP 4: Start enjoying the benefits and flexibility offered by a margin account.

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Disclaimer

This article does not represent a BUY or SELL recommendation on the stock covered. Traders and Investors are encouraged to do their own analysis on stocks instead of blindly following any Trading calls raised by various parties in the Internet. We may or may not hold position in the stock covered, or initiate new position in the stock within the next 7 days.