With reference to my market write-ugp dated 23 Oct (click HERE), where I mentioned that I was buying on dips and was judiciously using leverage via my newly open margin account to accumulate stocks, S&P500 has rallied 8.6%. However, STI is still languishing at almost similar level vs my write-up.
Post my write-up, some readers and clients have enquired on the margin account. Hence, I have done a short write-up on margin financing.
What is margin financing? What are the things we should be aware of? Read on for more below.
A) What is margin financing?
Margin Financing is a credit facility that allows you to magnify your initial investments through leverage. You can either deposit cash, or pledge existing marginable shares as collateral. Collateral pledged will remain part of your collaterised portfolio. Interest will only be charged on the amount of credit utilised on a daily rest basis and you can repay the principal at your convenience. You can click HERE to know more on how it works.
What are the things we should be aware of in a margin financing account? Some important aspects are the financing rates; list of marginable securities; corporate action fees and ease of opening an account.
B) What is the interest rate that CGS CIMB offers?
Below are the two interest rate schemes which CGS-CIMB offers. Suffice to say that for most clients, they are likely to choose Scheme II – Grade Based Margin Financing (GBMF) over Scheme I (flat tier, regardless of quality of stocks) as they mainly use margin financing to accumulate Grade A stocks. Why? Firstly, small caps, because of their lower price denomination, we typically don’t use leverage as we should be able to accumulate with a meaningful exposure. Secondly, small caps may, or may not be marginable. Thirdly, small caps typically are rather volatile. If we use leverage on small caps, our “market risks” may be compounded.
Figure 1: CGS-CIMB offers two interest rate schemes
Source: CGS CIMB
How do we stack against our peers?
According to CGS-CIMB, here are four key points on how we stack against our competitors.
A) Over 800 Grade “A” Counters under GBMF
Out of seven brokerages, CGS-CIMB is one of the three brokerages which offers GBMF, with a wide selection of good quality marginable securities.
B) No foreign dividend processing fees
CGS-CIMB is one of the three brokerages which waives the dividend processing fees for shares traded on HK and US markets.
C) Transparency of rates
CGS-CIMB is the only brokerage offering floating rates, which are pegged to the respective overnight reference rates published publicly i.e., SORA, HIBOR and SOFR.
D) Seamless account on-boarding process
Clients can easily apply for a Margin Trading Account (“MTA”) using Singpass. CGS-CIMB grants you real-time approval to access your MTA (subject to approval).
Table 1: How CGS-CIMB’s margin financing stacks against its peers
Source: CGS CIMB, various websites
Conclusion – Margin Financing is not for everybody
Notwithstanding S&P500’s 8.6% rally since 20 Oct, Singapore and Hang Seng markets still present interesting opportunities for the well prepared. *Table 2 shows the top ten SGX listed stocks sorted by total potential return ranging from 63% – 84%. A margin account may be arguably useful to accumulate some blue chips in Singapore and Hong Kong markets.
Table 2: Top 10 SGX listed stocks sorted by total potential return
Source: Bloomberg as of close 1 Dec 23
Nevertheless, I hasten to add that margin financing is a leveraged instrument and is a double-edged sword. Thus, there is always the possibility that one may lose more than your principal put in. Hence, it is not for everybody. Everybody is different hence you need to understand and assess yourself. The above is for general information only. For specific advice catering to your specific situation, do consult your financial advisor or banker for more advice.
Readers who wish to know more can consider calling 1800-5389889 to enquire more on our margin products. *Going forward, as the above compilation requires much time to manually compile it, to maintain the exclusivity, I will only send it to my clients. Readers who wish to enquire on being my client, they can consider leaving their contacts HERE.
Please refer to the disclaimer HERE