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Case Study: Effective use of Margin Finance

On 16th January 2014, I gave a talk on share investment in the Ipoh St John Ambulance Hall. About 240 people attended. In my talk I told them that the most important share selection criterion is profit growth prospect and not the current earning. I gave Jaya Tiasa as an example which was selling at Rm 2.10.

Its current earning is poor but its future earning will continue to increase in the next 5 or more years as the average age of the palms is only about 6 years, bearing in mind that FFB production peaks at the age of about 11 years.

I also told them how to use margin finance to increase profit, especially the current interest rate is only base lending rate of 6.6% minus 2 % = 4.6% without roll over fees.

Among the attendees who wrote to express their gratitude, one said that he had bought 100,000 JT shares at Rm 2.10 with his own capital of Rm 210,000 and bought another 100,000 shares using margin finance. Since the price has been going up and his collateral value has also increased, he could buy more shares, but he did not.

As you all know the price of JT is currently trading around Rm 2.70. Supposing he sold the 100,000 JT shares which he bought using margin finance at Rm 2.70 to  pay the margin loan of Rm 210,000 plus about Rm 2,000 for interest, he would have a profit of Rm 270,000 – Rm 212,000 = Rm 58,000 cash. The current value of his holding of 100,000 shares which he bought with his own capital of Rm 210,000 is worth Rm 270,000. The paper profit is Rm 60,000. The total profit will be Rm 118,000 which is about 56% in two months.