Beginner’s guide to share margin financing in Malaysia

Updated 18 Jul 2017 – By Loanstreet


Share Margin Financing (SMF) is a type of revolving credit facility provided to investors to finance their share trading and investment activities. Investors can buy shares on borrowed money that is secured by collateral. This article explains everything you need to know about how the share margin financing process works in Malaysia.

In Malaysia, share margin financing can be provided by Conventional Banks (E.g. CIMB, Hong Leong Bank, Maybank) and Brokerages / Investment Banks (E.g. Kenanga, Maybank Investment Bank, RHB Investment Bank).  Facilities provided by conventional banks are regulated by Bank Negara Malaysia, whereas brokerage-provided facilities are regulated by Securities Commission Malaysia.

It is not uncommon for two entities under the same group (e.g. RHB vs RHB Investment Bank) to both provide SMF packages with differing terms and conditions.

Collateral is usually required to be able to obtain the share margin financing. Acceptable forms of collateral include cash, warrants of certain shares, unit trusts, fixed deposits and quoted securities on Bursa. It is important to note that acceptable types of collaterals may differ between each lender.

While largely similar, there are some subtle differences in the SMF packages provided by banks and brokerages. Below is a breakdown and explanation of some of the features to consider when making comparisons:

TERMINOLOGY

DESCRIPTION

Share Margin Financing Ratio
a.k.a. Margin of Finance (MoF)

The maximum amount of financing available based on the underlying collateral.

MoF = (Total  Outstanding Loans - Cash) / Total Share Equity
Typically ranges from 50-60%

Some lenders (especially brokerages) calculate the margin of finance using an inverse of the above formula.

Drawdown Facility

Borrowers can withdraw surplus cash (new purchased securities, dividends & profits) from the margin account within the financing ratio limit.

However, not all lenders provide such a facility. This is more common for bank-provided facilities.

Interest Rate

The interest that is charged on the utilized facility amount.

Can be fixed rate or floating rate.

Rollover Fees

Charges for outstanding share purchase contracts that are carried over to the next period (normally brought forward on a quarterly basis)

Margin Call

A margin call is made by the lender when the value of the collateral falls below a certain percentage to the financed amount.

When a margin call is SMF made, the borrower is required to top up the value of the collateral (g.g. top up cash, or pledge more shares) to meet the required MoF within three trading days.

Forced Call

Should the borrower fail to top up when a margin call is made, the lender has the right to liquidate the margin account. This is known as a Forced Call.

Margin  Multiple

This is a multiplier on the value of the pledged collateral which defines the maximum amount of financing available.

E.g.: A bank provides 2.5x financing for pledged FD. So by pledging a FD of RM50,000 you would get:

Total Financing Limit = (RM50,000 x 2.5) + RM50,000= RM175,000

Example of a scenario

Beginner’s guide to share margin financing in Malaysia

Johan can proceed to purchase 250,000 units of ABC stock at RM1. This brings his margin of finance squarely to his limit of 60%. How did we get to this conclusion?

Beginner’s guide to share margin financing in Malaysia

When the price of ABC stock climbs to RM1.20, Johan’s Margin of Finance becomes 50%.

Beginner’s guide to share margin financing in Malaysia

Because of this, Johan can afford to borrow some more to finance his purchase of the shares. He decides to purchase an additional 62,500 units of ABC stock at RM1.20 for a total of RM75,000.

Beginner’s guide to share margin financing in Malaysia

After his additional purchase, the value of ABC stock gradually declines. When the price reaches RM1.02, the bank makes a margin call as his margin of finance has increased to 70%, which triggers a margin call.

Beginner’s guide to share margin financing in Malaysia

At this point, Johan will have to top up cash or sell off some shares to bring his margin of finance back down to 60% to avoid the bank from making a forced call.

Conclusion

Share margin financing is considered a sophisticated facility meant for stock market investors. However, it is not immensely difficult to understand, and even less difficult to get started (just check with any brokerage or bank!). Lastly, make sure to always practice caution and do not over-leverage when using financing to make investments into the stock market.

 

* Content assistance provided by www.investalks.com - A Chinese language forum dedicated to discussions on shares and investments.

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