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Margin lending explained. How does a margin loan work? What are some of the benefits? Boost your investing power - increasing the size of your investments could amplify your profits in a rising market as well as increase the size of any dividend payments Diversify your portfolio - access to more funds means you could diversify across different asset classes, industries and companies. What about the risks? How does a margin call work?
There are three different ways you can do this: Top up the loan balance with cash Sell some of your portfolio and use the proceeds to repay a portion of the loan Transfer existing securities not currently being used as security on the loan to increase the borrowing limit. Find out more Find out more. Featured products. Investment loans Westpac Share Trading Ready-made investment portfolios Build your own investment portfolio. International Markets.
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Popular Courses. Investing Investing Essentials. What Is a Marginal Lender? Key Takeaways A marginal lender is a lender that will only make a loan at or above a particular rate of interest. A marginal lender should not be confused with margin lending in securities markets or overnight lending between banks. Article Sources. Investopedia requires writers to use primary sources to support their work.
These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.
You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Compare Accounts. In addition, by gearing conservatively, the borrower could potentially reduce the possibility that a reduction in the security coverage ratio could result in a margin call as the borrower would have borrowed less under the loan.
Borrowers should seek legal advice on the documentation relating to the margin loan and, importantly, any related custody and security documentation to ensure that they are familiar with their own obligations, the lender's rights and the timeframes within which margin calls must be met and how long the lender is required to wait before it exercises its rights. There is also a risk, in the case of illiquid securities, that the valuation obtained by the lender is too low and that under the Financial Collateral Regulations see below , the security is effectively appropriated by the lender.
During the life of the loan, it is important that borrowers check their loan account regularly as the value of the mark-to-market value of the portfolio could change very quickly and, if the value falls, the borrower must ensure that, if required, it will be able to sell the portfolio assets, or pay down the loan, or top up with other assets, bearing in mind that the timeframes within which margin calls must be met can be very short e.
The terms of the margin call provisions and valuation mechanics in the margin loan agreement are the area of the most focus for negotiation in these transactions. Agreeing the frequency and method of valuation is critical. If the underlying portfolio is a range of interests in managed funds, then the lender will typically expect "haircut" mechanisms, an ability to exclude assets from the collateral pool in the event of liquidity constraints imposed by the fund manager under the terms of the fund documentation.
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