Buy stocks under cash account
Example
Initial capital outlay $200,000
Buy xxx stock with a dividend yield of 7%
Total return per annum: $14,000
Margin Financing via Kim Eng
Initial capital outlay $200,000
Buy Grade A stock with a dividend yield of 7%
To find out whether your stock is a grade A stock, click here
With $200,000 stocks as collateral, available financing is $450,000
Utilize $450,000 to buy Grade A stock with 7% yield, interest per annum 2.88%
Total return per annum: $14,000 + $31,500 - $12,960(2.88% interest p.a.)
Total return per annum: $32,540
Risks of margin financing
The risks of margin financing is that if the borrowings used to buy shares fall below a certain ratio level, a cash top up will be needed to maintain a margin ratio of 140%.
With a $200,000 capital outlay of cash/stocks, stocks bought at $450,000
Amount of financing: $250,000
Day 1
Margin ratio = $450,000/($250,000) = 180% (current margin ratio)
Day 2
$450,000 stocks become $340,000
Margin Ratio = $340,000/$250,000 = 136%
A margin ratio of 140% is required to maintain your financing, a failure to top up may cause your shares to be forced sold.
Therefore, in order to maintain the 140% margin ratio, he needs to top up $10,000.
