Most expats don’t know what margin trading is. They could be missing a trick
Should you ever borrow money to invest? Most expat investors would give a firm ‘no’ to that notion, and in most cases, they would be right.
But not in every case. The answer depends on what you are investing, and how you borrow the money.
For example, you would be crazy to borrow money on a credit card charging 40%, and use it to buy a highly volatile asset, such as a hot new crypto-currency you've just read about.
If you do that, you are gambling with money you do not have. If your crypto crashes, you still have to pay the debt back.
Nobody wants to find themselves in that position.
Yet there are occasions when borrowing to invest, or leveraging, can be the right thing to do.
Provided you go the right way about it.
Make that margin call
So what happens if you spot an unmissable investment, but don't have ready cash to hand?
It can easily happen, especially in today's volatile markets. As share prices bounce around due to Covid-19 and other uncertainties, fantastic buying opportunities can suddenly present themselves.
As I write this, stock markets are crashing, Bitcoin is surging, the US dollar is softening, the oil price has fallen to a six-month low and gold is trading well below its August high of $2,084 an ounce.
Any of these movements could give you a chance to swoop on your favourite assets at a reduced price.
If you don't have cash to hand, the moment will pass and you may have missed out on a great opportunity.
You don't have to stand idly by, though.
You could raise the money by borrowing funds against your existing portfolio, known as margin trading.
Margin trading, also called Lombard lending, involves borrowing money from your brokerage and using the loan to buy more assets.
The broker uses your existing investment portfolio as collateral. If you are unable to repay the loan for any reason, it can sell those assets to get their money back.
This gives your broker the security it need to offer you a competitive rate of interest, often far lower than on traditional lending.
Swissquote, for example, charges base rate in your chosen currency, such as euros, dollars or pounds, plus between 1.99% and 4.99%, depending on how much you borrow.
With eurozone rates negative at time of writing, there is no base rate charge, so you could pay 4.99% to borrow up to €50,000, falling steadily to just 1.99% on loans of €1 million or more.
A US dollar benchmark lending rate of just 0.15% means you might pay around 5.14% to borrow $50,000, or as little as 2.14% on $1 million or more.
Margin trading can be cheaper than borrowing money from your bank, and a lot more flexible as well.
Fast and flexible
Most expat investors have not even heard of margin trading, and will head straight to their bank when looking to raise money.
That may not be possible if you live in a country where credit is in short supply or hard to access.
Even if borrowing is available, credit cards are too expensive to use for trading purposes, while personal loans can be inflexible, as you typically have to repay the capital and interest over a fixed period of several years. You do not want to commit to a lengthy credit term, to snap up a short-term buying opportunity.
This is where margin trading’s greater flexibility may work for you. Rather than commit yourself to regularly repaying a chunk of the capital every month, you borrow money at a variable rate of interest and pay off the debt whenever it suits you.
You only pay interest on the money you borrow, which again, keeps your credit costs down. There is another advantage. Once you have set up your facility, you can borrow money quickly to snap up a sudden investment opportunity.
You do not have to sell existing assets, so your portfolio remains fully invested all the time.
Margin lending isn't just for people who want to invest money. It can also help expats who need to generate a bit of liquidity to meet temporary calls on their pocket.
This way they do not need to offload long-term assets such as shares, with all the worries that brings about market timing.
When stock markets crashed in March, a key factor driving the sell-off was a lack of liquidity.
Investors even sold supposed safe haven assets such as gold and bitcoin, in an urgent bid to raise cash, until the US Federal Reserve rushed to the rescue with unprecedented stimulus.
Nobody wants to dump assets after their value has fallen sharply, and miss the subsequent rebound.
Margin lending can help you avoid that fate.
Make the right call
While leveraging your portfolio can give you potentially higher investment returns, the risks may be higher, too.
The obvious danger is that your chosen investment falls in value, so that it is worth less than you borrowed.
If that happens, you may have to liquidate other portfolio holdings, to pay back the money you borrowed.
You should therefore "stress test” your portfolio first, to see how it might perform if stock markets do crash. If you are heavily invested in volatile equities, margin lending may not be for you.
However, if you have a well-diversified portfolio, with exposure to asset classes that hold their value or even rise in times of volatility, such as bonds or gold, this will greatly reduce the risk.
That way you can avoid having to sell, say, equity holdings after stock markets have fallen.
Instead, you could take some of your profits from bonds or gold, which may have risen in value.
While margin trading can help you take advantage of exciting investment opportunities, beware using it for high-risk speculation in volatile assets.
Is it right for you? That’s your call.
Harvey Jones has been a UK financial journalist for more than 30 years, writing regularly for a host of UK titles including The Times, Sunday Times, The Independent and Financial Times. He is currently the personal finance editor of the Daily Express and Sunday Express, and writes regularly for The Observer and Guardian Unlimited, Motley Fool and Reader’s Digest.
Swissquote Bank Europe S.A. accepts no responsibility for the content of this report and makes no warranty as to its accuracy of completeness. This report is not intended to be financial advice, or a recommendation for any investment or investment strategy. The information is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Opinions expressed are those of the author, not Swissquote Bank Europe and Swissquote Bank Europe accepts no liability for any loss caused by the use of this information. This report contains information produced by a third party that has been remunerated by Swissquote Bank Europe.
Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.