Behind the margin loan headlines

Robin Bowerman, Head of Retail at Vanguard Investments Australia.
Robin Bowerman, Head of Retail at Vanguard Investments Australia.

WITH margin loan court cases still making headlines in the wake of the bear market, it is interesting to note that margin lending appears to be making a comeback.

Reserve Bank statistics show that the total margin lending debt plummeted to a long-time low of $18 billion in September last year – down from an all-time high of $38 billion in December 2007.

But a turnaround in the popularity of margin loans could be taking place. In December, margin lending debt rose to more than $19 billion as the number of investors with margin loans increased to 240,000 – up by 23,000 from September.

An indirect effect of the court room clashes over margin loans and margin calls is to reinforce to investors the possible risks – and possible rewards – of borrowing to invest.

The lessons of what can go wrong are too easily forgotten by many investors, particularly given the resurgence in share prices since March.

Borrowing to invest is, of course, a standard and much-accepted investment strategy, but investors need to fully understand the potential downside. This understanding should help keep their borrowing at a reasonable level.

Fortunately, the Government has proposed a mandatory product disclosure statement (PDS) for margin loans that would explicitly outline how a margin loan operates; the triggers for margin calls; the benefits and risks of margin loans; and all of the costs.

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Robin Bowerman, Vanguard Investments Australia's Head of Retail, has more than two decades of experience in the finance industry as a writer, commentator and editor.

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