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Tuesday 11

December, 2018 9:20 AM


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Shares buffer

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What does it mean?

Margin loans stipulate the amount you can borrow (your loan limit) and a small buffer (usually 5 to 10%). If you borrow more than your buffer you are subject to a margin call. A shares buffer means that small falls in the market don't result in a margin call.
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TheBull says...

Let’s say that you pledge $30,000 of your own shares and borrow a further $70,000 from a margin lender and invest the entire amount, $100,000, into a portfolio of shares. Your LVR in this example is 70%.

If the value of the portfolio falls from $100,000 to $90,000, the LVR of 70% will be exceeded and a margin call will be triggered. To calculate the LVR, simply divide the loan amount, $70,000, by the total value of the portfolio, or $90,000, giving an LVR of 78%. Since an LVR of 78% exceeds the permissable LVR of 70%, we’ve entered margin call territory.

Margin lenders offer a buffer margin – typically 5 per cent - before issuing a margin call. Therefore, depending upon the lender, the LVR could rise to, say, 75% in our example before triggering a margin call.
 

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