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As we improve our investing skills and knowledge, investors may come across the term – share financing which is a service offered by brokerages to their customers.
What Is Share Financing?
Share financing allows investors to borrow money from the brokerage to leverage for a larger investment position in the market. This can enhance our potential returns but also increase our risks with the use of leverage.
We can choose to either use shares or cash as collateral for share financing. If we choose to use shares as collateral via OCBC Securities, we can receive up to 2.5 times leverage. If we choose to use cash as collateral, we can receive up to 3.5 times leverage using OCBC Securities.
We can use share financing to increase our potential dividend income. With OCBC Securities, if we deposit S$50,000 cash as collateral, we will be able to purchase up to S$175,000 worth of shares.
As we are securing our borrowing using shares or cash, share financing is considered a secured loan. Thus, the interest fee is typically lower compared to other types of loans, such as credit cards and personal loans. For example, with OCBC Securities, the interest can start from as low as 2.8% per annum.
If we are investing in foreign markets, we also have the option to transact and finance our loans in foreign currency. For example, OCBC Securities allow us to finance our trades in 4 different currencies: SGD, HKD, USD and AUD.
Trading On Leverage
However, using share financing is a form of trading on leverage. While this has the potential of giving us higher returns, we also take on higher risks.
We will need to maintain a minimum margin ratio when trading on leverage. For OCBC Securities, if our margin ratio falls below the assigned ratio, e.g. 140%, our portfolio will be in margin call. This means that we will need to bring up the margin ratio up to 140%, by either liquidating some shares or topping up additional collaterals such as cash deposits or share transfer to our margin portfolio.
Find out more about share financing at OCBC Securities.