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Margin Lending In Action
An investor acquires a portfolio composed of Share A and Managed Fund B which are Acceptable Investments and become the Secured Portfolio under their Ord Minnett Margin Loan.
Components of the Investor’s Margin Loan
| 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 a current price of $5.00) | $60,000 |
| Lending Ratio | 50% | 70% | |
| Loan (Maximum amount the investor can borrow given the Lending Ratio) | $5,000 | $35,000 | $40,000 |
| Funds you contribute | $5,000 | $15,000 | $20,000 |
Comparisons between Gearing and No Gearing
| With a margin loan | Without a margin loan | |
| The Investor’s funds | $20,000 | $20,000 |
| Loan | $40,000 | $0 |
| Market Value of Acceptable Investments | $60,000 | $20,000 |
| Positive impact : price increases | ||
| Market Value of Acceptable Investments after 10% assumed increase | $66,000 | $22,000 |
| Remaining capital after loan repayment | $26,000 | $22,000 |
| Gain as percentage of funds invested | 30% | 10% |
| Negative impact : price decreases | ||
| Market Value of Acceptable Investments after 10% assumed decrease | $54,000 | $18,000 |
| Remaining capital after loan repayment | $14,000 | $18,000 |
| Loss as percentage of funds invested | (30%) | (10%) |
Results
With a margin loan, a 10% change in the market had a 30% positive or negative impact on the investor's portfolio. Without a margin loan, a 10% change in the market had a 10% positive or negative impact on the investor's portfolio.
Gearing magnifies your gains and losses. You can increase your investment portfolio by 30% compared to 10% in a positive market, which is an additional $4,000 profit, as illustrated in the above example.