Essay about Part 1

Submitted By reportuser1001
Words: 1137
Pages: 5

Question 1 Margin Lending
Part 1 Margin lending is an investment method ,simply defined as borrowing money to invest .People could use this financial tool, known as gearing , to make loan to invest while using individual’s deposit or shares as guarantee.With extra capital , people are able to invest over a wider range of assets ,and accelerate the returns . Once people start a margin loan, they required transferring the current shares, funds or depositing into it as collateral, building up their own investment portfolios .After that, they could buy, sell or transfer the cash within borrowing’s allowed scale. People should be aware of the gearing level and keep it below the maximum limits ,since the gearing level fluctuate daily according to the portfolios and transactions, the interest is evaluated daily based on the loan balance and reimbursed in light of loan arrangement. From the lender’s aspect, due to the fluctuation of share price ,the borrowers are confront with the risk of devaluation of shares, the lenders use a Loan to Value Ratio (LVR) to evaluate the risk of people’s loan. LVR is calculated as the loan divided by the total value of the borrower’s shares .the lenders will use LVR to decided how much they could borrow., most lenders maintain the LVR below 70%.If the market value of the shares or security portfolios decrease dramatically and the gearing level (loan) exceeds the maximum LVR, a margin call could happen, which requires borrowers to invest more cash or repay parts of the loan to get the LVR back to a normal level. When the borrowers are short of cash, or cannot give the lender additional security, the lenders have the right to sell the shares to pay the loan. This increases the potential losses.

Part 2 Margin lending as a method of investment has not been regulated and managed under the Consumer Credit Code in Australia in the past years. However, most financial facilities which provide margin loans are under the regulation of the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC), therefore, their lending is required to various disclosures and consumer protection methods.
Additionally, the Council of Australian Governments permitted the Commonwealth Government to be obligated for the regulation of margin lending institution national wide, especially after a dramatic decline in Australian’s share market in 2008.The Commonwealth Parliament passed the Corporate Act 2001(subsection 798G(1) ),which includes all the margin landings and aimed to strength protection of borrowers. In other words, margin lenders are regulated by ASIC and required to have an Australian Financial Services Licence. The margin lending institutions are also responsible for assessing and confirm the financial situations of the borrowers when providing loans .The legislation has a direct influence on the ASX, the largest market operator in Australia The Australian Government has issued a draft legislation regarding to the disclosure requirements of margin loans and Product Disclosure Statement (PDS) for gathering public ideas. The PDS are planned to reduce the risk and cost of investors, while made the provisions and disclosures easy to understand.

Part 3 In Australian, it is popular for the young to middle aged people to take margin lending as an investment method to achieve their financial targets. In an efficient market with effective regulations, margin loan can accelerate to reach individual’s financial goal .People can make a loan to extent the investment portfolio, this can enhance the wealth growth rate and may get more dividends. Moreover, it can diversifying the investments .A wider range of investment portfolios are able to lower the risk that any poor performance investment will reduce the total return .In addition, people can borrow against a current share portfolio and invest the funds to a new investment without selling their assets,…