How to use margin finance safely? 

Koon Yew Yin 12 June 2020

They say a good teacher is a stupid teacher because he knows how a stupid mind works. 

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They say a good teacher is one with experience. 

I think I am qualified to write this article because I was so stupid to buy Dayang shares with too much margin finance. As a result, I lost a significant sum of money. This was my most expensive mistake and experience in my life. 

My aphorism of the day: margin finance is a double edge sword. It cuts both ways. You can double your winning and you can also double your losses. 

The question is how to use margin finance safely and wisely. Since the interest rate for margin finance is only about 5% pa, experienced investor should use it to make more money. But you must remember that it is a double edge sword. 

To avoid margin call, you must not use margin finance up to its limit all the time because when the price drops, you will be forced to sell. The more you sell, the more the price will drop-thus be creating more margin call. Forced selling is a vicious cycle.   

To avoid margin call, you must sell some of the shares which you have bought with margin finance when the shares go up too fast. 

For example: Both Comfort and Supermax have shot up more than 400% in the last 2 months. They have been dropping in the last few days rapidly due to forced selling. Many investors are forced to sell to meet margin call. 

Even Top Glove’s fantastic performance announcement   could not help to lift up Comfort and Supermax. Many are expecting the rising tide can lift up all boats.        

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