OPINION

Opinion: How to use margin finance safely? 

By Koon Yew Yin 

Disclaimer: The views, thoughts, and opinions expressed here belong solely to the author, and not to Ipoh Echo Sdn Bhd.

They say a good teacher is a stupid teacher because he knows how a stupid mind works.

They say a good teacher is one with experience.

I think I am qualified to write this article because I was so stupid to buy Dayang shares with too much margin finance. As a result, I lost a significant sum of money. This was my most expensive mistake and experience in my life.

My aphorism of the day: margin finance is a double edged sword. It cuts both ways. You can double your winning and you can also double your losses.

The question is how to use margin finance safely and wisely. Since the interest rate for margin finance is only about 5% pa, an experienced investor should use it to make more money. But you must remember that it is a double edged sword.

To avoid margin call, you must not use margin finance up to its limit all the time because when the price drops, you will be forced to sell. The more you sell, the more the price will dropthus you’ll be creating more margin calls. Forced selling is a vicious cycle.   

To avoid margin calls, you must sell some of the shares which you have bought with margin finance when the shares go up too fast.

For example: Both Comfort and Supermax have shot up more than 400% in the last 2 months. They have been dropping in the last few days rapidly due to forced selling. Many investors are forced to sell to meet margin calls.

Even Top Glove’s fantastic performance announcement could not help to lift up Comfort and Supermax. Many are expecting the rising tide to lift up all boats.     

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