Debt Management and Leverage

Margin lending

Margin calls

If the investment value drops you may go over your borrowing percentage limit, resulting in a margin call.

Let’s go back to the previous Company X shares example, with $25,000 of your money and $75,000 of borrowings (an LVR of 75%).

If the Company X Shares drop by 10%, the investment value drops by $10,000, to $90,000.

You need to recalculate the LVR (that is borrowings divided by investment value). The LVR is now 83.3% ($75,000 divided by $90,000).

The 83.3% is now over the 75% limit and a margin call occurs. The margin lending provider will require you, the investor, to rectify the borrowing percentage so that it comes back down to 75% or less. You could rectify this in a few ways:

  • Make a loan repayment.
  • Sell some of the assets to repay the loan.
  • Provide more assets as security for the loan.