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A margin loan is a form of gearing, or borrowing money to invest.
Australians are very familiar with gearing when it comes to property investment and are now recognising that gearing in the share market can be a flexible tax-effective investment.
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Most people will borrow at some stage in their life to buy something. Gearing allows you to invest in more shares or property than you could otherwise afford if you paid in full with your own money. |
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A margin loan allows you to borrow money to invest in shares or managed funds by using your share portfolio as security for the loan. This is similar to borrowing to invest in property, where the property is used as security.
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By combining the funds borrowed from your margin loan with your own funds or existing share portfolio, the amount you can invest is increased. Investors generally use margin loans to increase their purchasing power so that they can own more securities, which in turn increases their potential returns.
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Borrowing to invest with a margin loan can be a simple, tax-effective way to build wealth no matter what your stage of life. It can significantly enhance your ability to create wealth through greater participation in the share market.
See an example of how a margin loan works.
Leveraging a portfolio is fast becoming a popular wealth creation strategy. However, you should be aware that while leveraging into investments increases the potential return on investments, it is important to recognise that it can also multiply the effects of falls in share market values. We therefore strongly advise you talk to your financial planner and/or stockbroker and ensure you understand the risks, the specific tax implications, as well as the legal and financial ramifications of a margin lending facility.
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