Managing your margin loan in a volatile market

29/04/2008

If you have a margin loan, you may be concerned about the impact of recent global market volatility on your investments, and the subsequent risk of a margin call. Here, we explore the relationship between margin calls and volatility, and how you may be able to reduce the risk of a margin call.

Margin calls - a call to action

A margin call usually results because the market has dropped and the value of your security portfolio has fallen, or the lender has reduced the lending ratio of a security you hold within your margin loan.

Both events reduce the amount you can borrow and increase your gearing levels (the ratio between the equity you hold in your investments compared to the amount of borrowed funds).

Minimising the risk of a margin call

While the possibility of a margin call is increased in times of market volatility, there are some steps you can take to minimise the risk.

Invest in quality

It may sound obvious, but investing in high-quality shares and managed funds can reduce the risk of a major loss or margin call. That's why you should consider seeing a financial adviser before choosing investments. Read more about why you should seek advice.

Limit your loan

Borrow less than your total loan limit. Limiting the amount you borrow ensures you can easily meet your regular interest payments and cope with any sudden financial emergencies. Learn more about loan limits and how much you can borrow.

Repay and reinvest

Regularly paying your loan interest helps to stop your loan balance from increasing. Not only does this reduce the risk of a margin call, it gives you the flexibility to invest more money if an attractive opportunity crops up. Re-investing distributions, or crediting them against your loan, also helps to reduce your gearing level. Read more about interest payments.

Manage and monitor

Keep track of your margin loan. Consider and plan an appropriate personal strategy that you can rely on in the event of a margin call. To track your BT Margin Loan, you can check your portfolio value, loan limit and loan balance 24 hours a day, seven days a week, through our website. Check our online services.

Careful timing

Be aware of timing. Mistiming can add to the risk of your margin loan. The timing of your dividend and distribution payments may not coincide with your interest payments.

A fall in the market between the time you place an order and settlement could mean the trade does not settle because you have insufficient funds available.

At any time, the lending ratio assigned to a security may change - it may even be reduced to zero. This can result in a margin call or the non-completion of transactions. Find out more about a margin call.

What happens in a margin call?

In a margin call situation, you’re required to take immediate action to restore your loan balance to your loan limit. Your options include:

  • Repay some or all of your loan balance;
  • Lodge additional acceptable securities;
  • Sell or redeem some or all of the portfolio and use the proceeds to reduce your loan balance.

To help manage your margin call, you can also use BT’s Transaction Simulator to assess the possible impact of any action you plan to take to correct your margin loan position. To find the Transaction Simulator, log on to your BT Margin Loan account on BT Online (secure) - (opens in a new window) and follow the links.

For more information

If you need more information about your margin loan or about margin calls, contact BT Margin Lending Customer Relations on 1800 816 222 with your client code ready, or visit www.bt.com.au/marginlending.

More resources and reading

Investing Markets and performance
Economics: Caton's Corner Superannuation