Looking to maximise your investing, but don't have the right amount of funds required? Margin lending is a financial practice that allows investors to borrow money to invest in assets such as stocks or exchange-traded funds (ETFs). The loan is provided by a broker (such as Tiger Brokers) or financial institution, and the investor’s existing investments are used as security against the loan. The main goal of margin lending is to increase purchasing power and potentially amplify investment returns.
While margin lending can help increase gains, it also increases risk. It is important for investors to fully understand how it works before applying for a loan.
Key terms in margin lending
Initial Margin: The amount of money an investor must contribute before borrowing.
Maintenance Margin: The minimum account balance required to keep the loan active.
Margin Call: A demand from the broker to deposit more funds or securities if the account value falls too low.
Leverage: The use of borrowed money to increase investment exposure.
Interest Rate: The cost of borrowing funds, charged by the broker.
What margin lending is and how it works
So, what is margin lending? When an investor opens a margin account with a broker, they deposit their own funds, known as the initial margin. The broker then allows the investor to borrow additional funds up to a certain percentage of the investment’s value. This is called a margin loan.
For example, if a broker requires a 50% initial margin, an investor with $10,000 of their own money may be able to borrow another $10,000, giving them $20,000 to invest. The borrowed funds accrue interest and must eventually be repaid.
The investments purchased using margin serve as collateral for the loan. Brokers or lenders will require the investor to keep the loan value ratio (LVR) to an agreed percentage, which is generally 70%. If their value declines, the broker may require the investor to add more funds or securities to maintain a minimum balance, known as the maintenance margin.
Understanding the loan value ratio (LVR)
The LVR is a simple formula to keep in mind:
LVR = value of the loan/value of your investments
Generally speaking, the LVR will go up if your investments fall in value or your loan gets bigger. If the loan exceeds the agreed value, it will trigger a margin call. Once a margin call is triggered, according to MoneySmart.gov.au, you generally have 24 hours to lower the LVR back to your agreed value.
Lowering the LVR can be done in a few ways, including:
Depositing more money to reduce your loan balance
Adding more security to increase your portfolio
Sell part of your portfolio to lower or pay off your loan balance
Benefits of margin lending
Increased buying power Margin lending allows investors to access more capital than they could using their own funds alone.
Potential for higher returns If investments perform well, gains are calculated on the total invested amount, not just the investor’s original capital.
Flexibility Margin loans can be used for various investment strategies, such as short-term trading or portfolio diversification.
Portfolio Diversification
Borrowed funds can be used to spread investments across different sectors or asset classes.
Risks of margin lending
Magnified losses Just as gains are amplified, losses are also increased when using borrowed funds.
Margin calls and forced liquidation If investment values fall sharply, brokers can issue margin calls or sell assets without the investor’s consent to recover the loan.
Interest costs Interest accumulates over time, reducing overall profitability. Investors should always be aware of the interest they are being charged and of any rate increases.
Market volatility exposure Sudden market movements can quickly erode equity in a margin account. It's important to note that market volatility could increase the likelihood of a margin call.
Who should consider margin lending?
Margin lending is generally more suitable for experienced investors who:
Understand market risks and leverage
Have a high risk tolerance
Can meet margin calls if markets move against them
Actively monitor their portfolios
It is typically not recommended for conservative investors or those investing for long-term stability.
Margin lending vs traditional investing
Traditional investing uses only the investor’s own funds, limiting both risk and reward. Margin lending introduces leverage, increasing both potential gains and potential losses. The choice between the two depends on an investor’s financial goals, experience, and risk tolerance.
Applying for a margin loan on Tiger Trade
Tiger Trade margin loans offer traders the ability to lend across multiple international markets and short international stocks. For investors looking to apply for a margin loan, we always suggest you consult your financial professional before entering into such a commitment.
Applying for a margin loan on the Tiger Brokers website is simple, and you can apply for a loan of up to AUD 80,000 with an annual rate of 7.99%.
New clients:
On the Tiger Trade desktop or the app, you must create an account by clicking "Sign up" and finalising the account opening process. You will then be given the option to apply for cash or margin, choose margin, and provide your basic financial details via the prompts.
Our team will review your application and get back to you within 2-3 business days to advise if you have been approved.
Existing clients:
Open the Tiger Trade app > Portfolio > Account > Upgrade to Margin and follow the prompts. You will be given the option to apply for cash or margin, choose margin, and provide your basic financial details via the prompts.
Our team will review your application and get back to you within 2-3 business days to advise if you have been approved.
Margin lending is a powerful investment tool that can enhance returns and provide greater flexibility, but it comes with significant risks. Understanding how margin requirements, interest costs, and market movements affect leveraged investments is important before using margin lending. Investors should carefully assess their financial situation and seek professional advice if needed.
All investment products carry risk and are not suitable for all investors. The value of your investment may go down as well as up, which means you could get back less than your original amount put in. Options trading, margin lending and short selling carries a high level of risk, and you should only trade with money you can afford to lose. For margin lending and short selling, if the value of your collateral falls or your position moves against you, Tiger Brokers (AU) may be required to sell your holdings or close your positions without prior notice to meet margin requirements or limit potential losses. Please ensure you fully understand the risks involved and seek independent advice if necessary. Past performance is no guarantee of future results. Information provided by TBAU is not intended to be advice. If any advice is included, it does not take into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether it’s appropriate to you, in light of your objectives, financial situation or needs. Please ensure you have read and understand the financial services guide, risk disclosure statements, relevant product disclosure statements and target market determinations, terms and conditions, and other disclosure and legal documents before making any decision about TBAU’s products or services.
Tiger Brokers (AU) Pty Limited, ABN 12 007 268 386, (“TBAU”), holds an Australian Financial Services Licence (AFSL) no. 300767.
