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Margin Finance: Advantages and Precautions

The first lesson in business school is that if you want to do any business with only your own capital, you are considered inefficient. You must borrow money from your wife, relatives, your friends or the commercial banks provided you have collateral, like a house.

When I started Mudajaya Construction Sdn Bhd in 1966 as a contractor in the Muda River Irrigation project, I could not borrow money from the bank because the bank would not accept all my excavators, bull dozers and trucks because they are moveable. The bank always requires immoveable collaterals like landed properties.

You should borrow money from the bank as long as you are sure you can make more money than the interest charges you have to pay to the bank.

The bank’s function is to collect all your money or your monthly pay cheques and lent it to borrowers who have immoveable collaterals.

Advantages

As I said earlier, you can do more business with borrowings, provided you are sure you can make more money than the interest you have to pay to the bank.

In equity investment, you can use margin finance to buy more shares provided you know how to select good shares from which you can make more money than the interest you have to pay. Currently, the interest rate for margin finance is 4.95% per annuum. I dare to use margin finance because I am sure that I can make more money than the interest I have to pay.

Precautions:

Margin finance is not for inexperienced investors because margin finance is a double edge sword. It cuts both ways; you will make more money when the share price increases but you will lose more money when the share price drops.

Unless you have the necessary skill to select good growth stocks from which you can make more money than the 4.95% interest you have to pay.

But be careful, you may say that you can easily make more than the 4.95% for margin finance. To be safe, you must not use up to the limit of the margin finance. Always allow some room in case the share price suddenly drops unexpectedly.

I wish to take this opportunity to explain more about my bad experience in dealing with dishonest Hong Kong billionaire Thomas Kwok of Sun Hung Kai Securities during the Tiananmen Square protests of 1989. As I said, when I had margin call, all my shares were swiped away into Thomas’s pocket.

Honest stock Broker

Fortunately, I also had another margin account with another stock broker namely Kaisai Stocks & Shares Ltd. in Hong Kong of which I was one of the 2 controlling shareholders, owning 46% share of the company.  When I had margin call, Kaiser sold just enough to cover margin call. Eventually when all the dust was settled, the share price of my major holding Henderson Land rebounded above its original level.

My advice:

My advice for you is never to use up the limit of your margin finance even if the stock complies with my golden rule for share selection because of unforeseen circumstances.

You can never be too sure of anything in life. Life has many obstacles but never give up because life has also many solutions.    

 

 

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