A margin loan allows an investor to borrow money using his shares, stock/ managed funds as security. The margin loan can earn a lot of remuneration or cause huge losses to the investor. Therefore, as a thumb rule, it is recommended for those seasoned investors who regularly monitor and assess the markets and have the capability to manage their investments.
How does a margin loan work?
Margin loans can be procured from stock brokerages or firms offering financial services, which the investor uses for trading the stocks/ security in question. The firm can offer margin loans against certain security stocks, shares, mutual funds that exist in your investment portfolio.
Customers who wish to avail of margin loans are usually allowed to borrow only half the value of the purchase price of the marginal investments.
The benefits of margin loans:
Once the investors gain an understanding of the market trends and its volatility, margin loans, though considered highly risky, helps in diversifying the investment portfolio and helps in cushioning the negative effects of price fluctuation in a concentrated segment.
Margin loans when availed of prudently improves the buying power of the investors and allows him to purchase a large variety of securities/ stocks giving the benefits of greater exposure to the market and improving the overall investment returns.
Margin loans have a minimum requirement of maintaining the requisite account equity level with the brokerage firm. There is no pressure of periodical and timely repayments on any margin loan availed. There is a lot of flexibility and this helps investors to earn windfall gains.
Margin loans help investors to undertake calculated risks and helps them stay in the market and helps them stay afloat in a difficult situation. As long as the equity levels in the account is maintained, the investors availing of margin loans can take calculated risks and have scope for big gains when the market is doing well.
Brokerage firms offer margin loans at competitive interest rates and hence a loan with a low interest could be very cost effective and beneficial to those availing of these loans.
The market volatility increases the risks involved to manifold. Investors may be forced to sell in a falling market at low prices and increase the risk of ‘margin call’.
Millionaire Blueprint with its automated software keeps an effective tab on the market trends and relieves the common investor from the burden of assessing and decision making at regular intervals.