As we all know, ‘it’s money that begets money,’ or in other words, it is easier to make money when you already have money. Investing with a margin loan involves putting a sum of your money together with a sum of money borrowed from the margin lender and investing the combined amount in either shares or managed funds. Investors pay the margin lender interest on the loan (around 10% at present) for the privilege of buying more stock than they could with their own money alone.
Understandably, the popularity of margin lending typically takes off during bullish sharemarkets when share prices are rising; when there are plenty of gains to be had, investors want as much exposure to the market as possible – and the more money on the table, normally the fatter the profits. Look at it this way: a 10 per cent return on a $20,000 portfolio makes $2,000 in profit, whereas the same return on a $100,000 share portfolio brings in $10,000.