For those of you who don't know, margin lending is a great way to leverage your assets and extend the amount of cash you have tied up in investments. How does it work? To put it simply, you “borrow” capital from an investment company or broker and use it to invest in approved shares or occasionally a managed trust fund of some type.
Here are seven really great advantages of this:
1. You can leverage your investments greatly.
By making use of a margin lender, you can greatly leverage the amount of capital you have invested at any one time. This means you can potentially recoup huge rewards if your investments do well.
The amount of money you can borrow is typically set against the amount of investments already in your portfolio. So, the greater the amount you have, the more you can borrow. This allows the savvy investor to really turn the screw on his or her capital and make every dollar earn an exponential amount back.
2. You can track your leveraged amount in real-time.
Modern technology allows us to actually track the leveraged capital in real-time. Websites like this one allow you to log in to your portfolio account and see exactly just how well your margin capital is doing in the markets.
Of course, this can sometimes be very addictive, but we would also suggest that you check in on your account once — perhaps twice — a week. Investments are long-term vehicles for capital growth, and you shouldn't make judgements based on daily changes. Still, even with the addictive quality of managing your funds online, it's still by far the best way to ensure you're keeping tabs on how your portfolio is performing.
3. You'll reach your investment goal much more quickly.
By introducing a margin to your capital, you can greatly increase the amount of start-up funding in the beginning of your journey. Think of it like gaining the benefits of compound interest, without having to wait years for that compound effect to take place.
This means you can earn what you may have by the fifth year straight from the get-go. Plus, the charge you'll have to pay for this additional credit should be dwarfed by the amount of capital you'll receive back on your investments.
4. You can link your margin capital to your real capital.
This is another brilliant innovation brought to you by technology. By linking a leveraged account and your traditional assets, you can see how each type of capital is doing in real-time and also begin to make judgements on how each is doing.
Do you believe your real assets are getting a better return? If so, release some of your margin capital toward that asset class instead.
Be careful, though. Always ensure you're spreading the risk, and don't place more than 10 to 20 percent of your capital in individual investment vehicles. If one asset class doesn't do very well, you need to make sure it doesn't have too harsh of an effect on your entire portfolio.
5. Margin capital is tax-deductible.
This is a huge benefit and cannot be understated. Because the start-up margin fund is technically a “loan” of some sort, it's actually tax-deductible against your tax bill.
This means that not only do you get the benefit of “compounding” in from the first year onwards, but you can also claim tax back against the loaned amount. That's a pretty sweet deal.
6. You can defer your tax, too.
Other than the fact that your margin fund is tax deductible, you'll also find that the margin fund will allow you to keep investing. This allows you to avoid having to sell funds to keep on investing more and more. The great thing about this is it you get to avoid having to pay capital gains tax and keep as much of your fund tied up at any one time.
Sounds complicated? Don't panic; all you need to understand is that while your fund is carefully earning you cash, the tax accountant cannot have access to it. He or she will only be able to claim when your capital is released.
7. There's room for extra diversification.
Extra capital means you can begin splitting your portfolio earlier and gaining the positive effects of diversification much earlier. You'll find yourself being able to take advantage of new companies. You can take advantage of growth and upturns in the market far better by spreading your investments.
Of course, there can be pitfalls to this, but with some careful research and planning, you can ensure all your investments are placed on a solid foundation.