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Sunday, 7 June 2015

Bearish Market - What's Next? Watch Out on Your Share Margin Financing Account - How to Make Friend or Foe with SMF

Dear Readers,

Market has not been kind to us for the last 2 months. Few of our followers is asking what do I think will happen next? Sorry, my crystal ball is not working. But I know when market is bearish, you gotta check on your Margin Financing Account.

A lot of traders / investors abuse the usage of SMF that makes them lost in the stocks trading.

Let me share the info on how most professional investors use SMF to leverage in their trading portfolio VS retailers who abuse the usage the SMF Account that leads to their Financial  Disaster.

Basically SMF is a FLEXIBLE LOAN WITHOUT MATURITY DATE for you to use it to leverage it for your trading. Why I called it FLEXIBLE? It is because you borrow the loan without the need to pay the the principle in your monthly installment. You pay for the Accrued Interest every month.

The best part is, the SMF has no maturity, you can use it perpetually (expect when the stock hits some financial disaster / bad Annual or Quarterly reporting that leads the stocks to be capped at certain price or maybe non margin able at all)

What went wrong with those who are using SMF till it went bust?

Generally we use LOAN / MARGIN when we do have an investment which carries the return higher than the cost. That's why we borrow and leverage on the loan:

Case Study:

1st Year Cost of Holding a Stock      2nd Year
Interest               : 4.85%                    4.85%
Facility Fee        : 0.50%                    0
Brokerage          : 0.42%                    0
Stamping            : 0.10%                   0
Bursa Clearing   : 0.03%                   0
Misc Fee / Cost  : 0.10%                   0.10%

(Rollover fee has been revised to 0 due to market competitiveness except for Single Counter Financing)

Total                    6.00%                    4.95%

How to use it THE RIGHT WAY !


RM 1m Margin Facility = Cost is 6% for the first year.
We ACCUMULATE around 40% to 60% (400k to 600k) of the Margin Limit. Why?

Things goes wrong when you have RM1m limit and generally retailers 'FULLY UTILIZED' the limit. When market turn south, a drop of 5% will trigger Margin Call and another drop of 5% will trigger Force Selling. Sorry GAME OVER.

When I accumulate let's say 50% of my Approved Limit of RM1m, market turn south and % of  Margin Financing Limit will balloon, it WILL LIKELY NOT TRIGGER THE MARGIN CALL AND FORCE SELLING. Furthermore, with market turn bearish, the balance capacity I have in Margin Account, I may consider to accumulate more stocks! Stock Price goes down, dividend yield goes up.

But But But, what kind of stocks normally we buy? We only pick the stocks that are ABLE TO GENERATE CONSISTENT DIVIDENDS THAT BEAT THE FINANCE COST.

Eg: Bstead 7.75% , Hektar 7.05%

 By earning 7.75% vs Finance cost 6%, the spread is 1.75% for first year
Carry forward to 2nd year : Earning of 7.75% vs Finance Coast 4.95%, the spread goes up to 2.5% 

Why Retailers Got Burned with Margin Account?

1. Simple, they apply margin to trade Small Cap / Penny Stocks / Speculative Counters - By the way, MARGIN FACILITY MAGNIFIES YOUR WINNING PERCENTAGE AND LOSSES AS WELL. That is why it is called LEVERAGING ACCOUNT.

2. The Stocks that you buy DOES NOT GIVES YOU INCOME / DIVIDEND. Every month you need to pay the outstanding interest, if the market goes against you and you have no Income to sustain your Finance Cost, what make things goes UGLY (remember last Sept and October 2014 Market Correction? How the Margin Accounts went wrong. And ya, in case if you not aware, it is JUST A CORRECTION not a CRASH yet.)  

(eg, CLOSE MONITORING of: Changes of interest rates, stocks capping monitoring, market sentiment, % exposed in the each industry you are investing etc etc)

4. No EXIT PLAN - FYI, for all Margin Users, especially Single Counter Financing, we would ask WHAT IS YOUR EXIT PLAN for SMF? You could not be using the Account Forever with no plan. Although it is a LOAN WITHOUT MATURITY, but part of the Risk and Reward Game, all Leveraging Game are always with an Exit Plan. If you do not have one, SMF account is not or you.


SMF is an Account for Professional Investor with good understanding of the Risk and Reward game,
It is not as simple as just borrow more limit and punt the market. If you are thinking that is so easy, you might have a better odds going to Casino De Genting and have fun.

For professional users, with PRUDENT PORTFOLIO MANAGEMENT, it may MAGNIFIES YOUR RETURN SLIGHTLY HIGHER, By the way, all the assumption  are without inserting the potential income from CAPITAL APPRECIATION. As long as the consistent dividend income able to cover the finance cost, the capital appreciation is a BONUS. Do not be over optimistic.

Lastly, during MARKET BEARISH - Please RE LOOK into your Margin Account, do not over leverage. Just a Friendly Reminder, if you still have the room for buying limit and market goes further south, you always can buy more.

Disclaimer and Declaration

The full content of the article is for educational purposes only and should not be used as investment recommendations. We are not responsible for all investment activities conducted by the participants and cannot be held liable for any investment loss. Examples of specific shares may be citied for illustration purposes.


Humble Pie

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