Let’s say that you pledge $30,000 of your own shares and borrow a further $70,000 from a margin lender and invest the entire amount, $100,000, into a portfolio of shares. Your LVR in this example is 70%.
If the value of the portfolio falls from $100,000 to $90,000, the LVR of 70% will be exceeded and a margin call will be triggered. To calculate the LVR, simply divide the loan amount, $70,000, by the total value of the portfolio, or $90,000, giving an LVR of 78%. Since an LVR of 78% exceeds the permissable LVR of 70%, we’ve entered margin call territory.
Margin lenders offer a buffer margin – typically 5 per cent – before issuing a margin call. Therefore, depending upon the lender, the LVR could rise to, say, 75% in our example before triggering a margin call.