Margin Lending is an excellent option for cash rich investors. Have you considered it? Why not look into the possibilities of setting up lending facilities for private clients. Obviously margin lending is not for everyone, there are risks and not every portfolio is ideal for the type of cash flow margin lending requires.
What is Margin Lending?
If you need to ask this question it is a good idea to have a long chat with a good finance consultant before leaping into the world of Margin Lending investments.
Margin Lending refers to a type of lending where the borrower provides enough collateral as security to a loan in order to exceed the amount borrowed. In other words a borrower would need to provide a security that is worth more than the amount borrowed. The difference between the value of the security (a house, jewelry, stocks, etc…) and the amount borrowed is the margin of security the lender has.
How big the margin is will depend on what the collateral provided is, the stability of its market price, the expectations of its future price and the credit standing of the borrower.
Margin Lending is used for all types of businesses, from real estate to Hollywood film productions however margin lending is especially popular when purchasing securities and commodity futures in the stock market.
In this setting the securities and commodity futures are purchased “on margin”, the buyer only supplying a percentage or margin of the purchase price while he borrows the remainder from his broker pledging the security as collateral for the loan.
One of the key considerations for Margin Lenders is determining the “right” margin for borrowers. The “right” margin is determined by the current market value of the security supplied by the borrower so a vigilant eye on the mood of the market is required. If the market value of the collateral supplied by a borrower drops this will reduce the margin available and the borrower may be called to restore the established margin to the prearranged level. The specific level is determined by the lender but minimum levels are established by the organized exchange in which the transactions are taking place.
The purchasing of securities on margin is regulated by the authorities, for instance in the United States the Federal Reserve Board regulates the minimum margin levels under authority of the Securities Exchange Act of 1934. However other markets like the British stock exchanges do not allow dealings on margin at all.
Margin Lending could be the right investment for you if you have a significant percentage of your portfolio in cash and have good cash flow for the short to long term. However as mentioned above a good understanding of the business is required and investors are well advised to seek expert counsel before embarking in this type of investment.
