Margin lending
Build a larger portfolio faster

If you’ve ever had a home loan, then you understand the benefits of borrowing to invest. Millions of Australians owe their prosperity to the loans that allowed them to buy a rapidly appreciating asset that they would never have been able to afford on their own. A margin loan takes the same principle and applies it to shares and managed funds.

By investing with a margin loan, you can build a larger portfolio faster, potentially earning more capital gains and more dividends for the same upfront investment. In fact, a margin loan can multiply your gains when you invest successfully. So if you use a margin loan to double the size of your investment, and your portfolio rises 10%, then you’ll make a 20% gain before paying off your interest and your investment costs.

That’s the upside — but margin lending also has its risks. If your investment falls, then a margin loan will multiply your losses in exactly the same way as your gains. Even a successful investment can underperform after taking interest costs into account. And finally, there’s the risk of a margin call if the market slumps unexpectedly.

The pros

Build a bigger portfolio faster

A margin loan gives you the capital you need to build a bigger portfolio today, potentially earning more dividends and more capital gains.

Diversify your portfolio

With more capital at your disposal, you can invest in a greater number of stocks, spreading your investment across sectors. That helps reduce to risk and smooth out investment returns over time.

Unlock the equity in your portfolio

By using your existing shareholdings as security for your loan, you can unlock the equity in your portfolio to multiply your investment power.

Invest tax effectively

Depending on your personal situation, a margin loan could help you maximise your after-tax return. Not only is the interest on your loan often tax deductible, a margin loan can help you earn more franked dividends, helping to reduce your overall tax bill. But remember — every investor is different and Australia’s tax laws are complex, so it’s important to get advice before you invest.

The cons

Margin lending multiplies losses

While margin lending multiplies your gains if you invest successfully, it also multiplies your losses if your investments fall in value.

Investment costs

To invest successfully with a margin loan, your after tax returns must be greater than your after tax investment costs. Otherwise, even a successful investment could become a loss-maker after you take costs into account.

Margin calls

If the market falls significantly, the value of your shares may fall below the level needed to secure your loan, triggering a margin call. If that happens, you may be forced to sell shares in an unfavourable market.

Using a margin loan with your InvestSMART account

It’s easy to trade on your margin loan with an InvestSMART account. Simply draw down your loan and transfer the cash to our CMC Markets Cash Account or other nominated settlement account.

Check with your margin lender to make sure you follow their terms and conditions when you invest.

Next steps