Hidden Risks Of Margin Loans
The Age
Wednesday January 19, 2000
The Australian Securities and Investment Commission has issued a ``consumer alert" about the risks associated with margin lending, warning investors that it could lead to financial ruin.
ASIC said yesterday that it was particularly worried about the surge in the product's popularity among retail investors, who had contributed to a blow-out in the total value of margin loans in Australia to an estimated $5.2 billion last year.
The Reserve Bank's semi-annual statement on monetary policy, released in November, revealed a spiral in the number of Australians who had borrowed money to try their luck in the sharemarket.
At the time, the Reserve surveyed 15 large margin lenders and concluded that margin lending had lifted by 38per cent in 1999, and by $3 billion over the past three years.
The attraction for retail investors is clear. The extension of margin lending, once the preserve of wealthy market players and institutions, to ``mums and dads" has given smaller investors the firepower they need to play the market.
The director of ASIC's national markets unit, Ms Claire Grose, said the investment watchdog was worried that consumers were not fully aware of their obligations.
``It's the risk of margin calls that differentiates margin-lending products from many other secured loans, and we want to make sure people are fully aware of that risk," she said.
Margin loans allow borrowing of money to invest in securities, with the investment serving as the underlying security for the loan.
Interest is paid on the borrowings, but investors may also have to pay a margin call if the value of their investments falls below a certain level.
The lender can make a margin call and demand, often within 24 hours, an increase in the level of assets securing the loan. This may require finding extra cash to pay the lender, even selling part of the portfolio to raise the cash, or giving the lender extra security.
The plunge in the Qantas share price in November was a typical example of how a blue-chip company can exhibit a volatile movement and trigger a margin call.
``While borrowing to invest can result in higher returns, it also magnifies the losses if the value of the investment falls," Ms Grose said. ``We would urge consumers to seek professional advice before taking out a margin loan."
Most of Australia's leading banks offer margin-lending facilities, marketing them as a financial planning tool, as do a legion of stockbroking firms.
© 2000 The Age