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Tuesday, 30 June 2015

Margin for Single Counter Financing - Expensive Yet People Still Using It. Why?

Dear Readers,

This article is meant to share on Margin Financing for Single Counter. It is not an encouragement / promotion for readers to invest using SMF.

Generally in Malaysia, the interest rate for Single Counter SMF ranges from 7% to 9%. The rollover fee is about 1% per quarter.
If your relationship (your business status) with the bank is good, you may get it around 7% plus 0.5% rollover fees per quarter. End up to be around 9% per annum all in.

If my holding cost is so high, why I am still using it? My dividend income definitely can't cover the cost of fund! Why still borrow and invest? Those who borrow have their objectives to be met. Let's look at some of it.

1. During IPO Listing
Certain parties would like to support the share price. Not all are IPOs are eligible for Green Shoe Option. For those who are RM500m and below for market capitalization post IPO and certain investors are aware the company is without a Green Shoe Option, they might need a plan. This investor group would like to see the share price to increase.
Assuming IPO price RM1, post listing down to RM0.80, your SMF will comes in handy.

2. To meet Corporate Exercise Objective
Company announcement follow by Private Placement, Right Issues and follow by Free Warrants to entice you to subscribe for the Rights. Insufficient monies to subscribe the Rights, the Margin just fit the bill. Short term financing, getting the loan, exercise the rights, sell the warrants, pay back the bank for Margin expenses.

3. Pending some contracts / awards / business announcement
Certain parties might receive the rumors that the company 'will be awarded' or 'will be posting good financial results'. They use the Margin to collect more shares before announcement.

4. House the Shares before selling to 3rd party
Certain investors will use it to house the shares and place it to 3rd party afterwords.
Eg. Fund House, Institutional Investors and Corporate Clients looking to buy a bulk for the listed shares.

5. Short Term Cash Rolling
The shares owner can pledge the shares to the bank and get a Short Term Loan for rolling purposes.
Bank will give a 'Hair Cut' generally 50% of your pledged shares value and gives you cash to settle your other business needs.

That is why you see, Single Counter Financing Account is for meeting your short term objectives with an EXIT PLAN. You can't keep using the Margin Account Forever without an Exit Plan.

For general retailers like us, we might not me having this Single Counter Financing Issue. Hope you have more understanding on usage of SMF after this.

Happy Trading !

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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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