What is it?
Similar to borrowing to invest in a property, borrowing to invest in shares can be done easily through specific loans designed for the purpose, commonly called Margin Loans.

How it can benefit you:
There are two ways in which gearing can benefit you:
Firstly, by leveraging off initial security (cash or shares) a far greater investment can be made to grow your wealth. With all capital growth, dividends and franking credits directed to you the investor, this is a great way to grow your portfolio.

The second advantage is that the interest that is paid on the borrowings is, in most cases, tax deductible allowing obvious benefits at tax time. Prepayment of interest on a fixed rate loan is another strategy that can help maximise these benefits.

The risks:
Gearing to Invest, whilst being advantageous in a rising market, can also have a similar negative effect in a declining market. If the security of the portfolio falls below the loan balance, then a Margin Call may be invoked requiring rectification, often in a 24 hour time frame. This risk can be managed effectively using several strategies such as low gearing levels, investing in a quality, well diversified portfolio, appropriate dividend handling and regular interest payments.

What it costs:
Outside the normal fees for a full statement of advice, the only cost is usually the interest charged by the lender. Consideration of fees by the Margin Lender should be taken, as these may be applicable in certain circumstances.

Do not hesitate to ask your financial planner for any further detail regarding this or any other strategy.

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