Monday, October 3, 2016

Financing Your Investments Using Borrowed Money: Margin Trading on GSE

image credit: claytrader.com
I am still deeply concerned about the speed of growth of the Ghana Stock Exchange. Market players are blaming it on the low level of activities on the market because investors are few and hence ‘Ghanaians do not invest enough’.  The question then is, do the few investors we have, get the necessarily tools, options and systems to facilitate the investment process? In cases where investors want to buy more stocks but short of funds, what happens next? Is that the end?
That brings me to the concept of Buying Stocks on Margin. When are we reaching a point where we can buy stocks and other securities on margin? Every time I interact with my colleagues in the market, I hear the response that, it’s in the pipeline. Truly, this pipeline is really long.

What Does Buying on Margin Mean?
Simply put, it is borrowing part of the total purchase amount of a position using loan from a broker. Margin trading allows you to buy more shares from a listed company with the financial help from your broker than you can normally buy. With Margin trading on Ghana Stock Exchange, the market doesn’t only increase in activities but also gives brokerage firms a lot of opportunities to grow bigger. 
Investor who trades on Margin vrs one who does not:
Margin is a double edge sword. As much as margin trading of stocks can bring some good things into the market, so is the risk and let’s see how bad it is.

Here is an example:  Imagine Investor A & B has Ghc 50,000 each worth of stock in their brokerage accounts and this allows them a margin debt of Ghc 50,000 to buy extra stocks (let’s say in a company priced at Ghc 1 per). If Investor A takes the margin available and buys more stocks at the said price, he gets Ghc 100,000 worth of stocks whiles Investor B only has Ghc 50,000 in his / her account. If the share price appreciates to Ghc 2 (100% increase), Investor A will now be worth Ghc 200,000 whiles Investor B will be worth Ghc 100,000. In this case, Investor A can then pay his debt of Ghc 50,000 to his brokers leaving him / her Ghc 150,000 which is Ghc 50,000 more than Investor B who never took the margin available.
On the other side of the coin, when share price in the said company falls to 0.50p, (50% lower), Investor A will get a Margin Call from his brokers requesting him top up his account with more money. In this case, the investor does not only lose 50% of his initial portfolio value but also has a debt of Ghc 50,000 to pay.
It’s always good to take advantage of the money available from your brokers but you need to be aware you stand a chance of wiping out all your equity, leaving you broke or bankrupt.
The beauty of margin trading in the Ghanaian market is that, you cannot wake up over night and see prices of stocks deep so low as a result of any news as it happens on the advanced stock exchanges. Thus if you do your homework well enough, you stand a chance of making a lot more than you equity will allow you. This obviously can create a lot more activity on the Ghana Stock Exchange.

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