When “expensive” shares seem out of reach, learn how SMF can help you.

When Malaysians look at personal money management and financial planning, a lot of them take their investments into account, and the name Bursa Malaysia comes to the forefront.

Bursa Malaysia is a fully integrated exchange that provides a full range of exchange-related services such as trading, clearing, settlement, and depository. A minimum of 1 lot is needed when investing in equities in Malaysia, and 1 lot equals 100 shares. Let’s imagine you decide to buy one lot of Company ABCDEF at RM70 per share. For this minimum transaction, you will need to shell out RM7,000. This is a pretty hefty price tag for regular Malaysians so many use share margin financing to help them afford it.

What is Share Margin Financing (SMF)?

SMF is a credit instrument that allows investors to use acceptable collateral to fund the acquisition of quoted securities on the Bursa Securities exchange.

This facility is designed for active and intelligent investors who want to take advantage of market opportunities while also expanding and broadening their portfolios or fine-tune their personal financial planning endeavors. This gives you more financial support so you can take advantage of the investing prospects that have been discovered. All you must do is put up cash or stock as collateral for the credit facility you’ve asked for.

However, banks have become more cautious, with stricter guidelines involving the imposition of price caps on certain shares (i.e., where the value of a share is capped at a certain percentage of its market price), the lowering of existing price caps on some shares, or the removal of certain shares from the list of stocks acceptable for financing purposes entirely.

Safety Features of SMF

SMF has greater credit risks, but most financial institutions have a three-tiered check-and-control framework in place to mitigate these risks.

These include the placement of price limitations on specific shares, the limitation of financing for stock acquisitions, and the exclusion of specific shares from the bank’s list of shares that are legal or acceptable for financing.

1. Banks typically do not give full value

The first metric indicates that the banks assigns a lesser value to specific shares than the stock’s market price.

This is sometimes referred to as the “bank value,” and it is derived using an arbitrary percentage of the stock’s market price. Speculative counters, illiquid counters, designated stocks, and stocks classified under PN4 conditions are often subject to price limitations.

2. Banks do not finance in its entirety

The second degree of regulation is that banks normally only lend up to a maximum margin of 50% of the underlying shares’ “bank value.”

This idea of margin of financing is like the margin of financing for an individual’s purchase of a passenger car or a home, where the bank will only finance up to a particular sum or percentage of the underlying asset’s market value or acquisition cost.

3. Banks won’t consider some financing

Of course, the third option is to declare unilaterally that specific counters or stocks are not legal or acceptable for financing. This is the equivalent of a bank refusing to finance cars that are more than ten years old through a hire purchase arrangement.

Why Use SMF?

After you sign the margin documentation, your SMF account will be set up within two working days. After depositing cash and/or transferring marginable securities into your margin account, you can begin trading.

A margin percentage of at least 140 percent must be maintained. New acquisitions are not allowed unless extra collateral is provided to raise the margin percentage to at least 140 percent. Collateral is accepted (cash / fixed deposits pledged, quoted shares on Bursa Malaysia).

  • Investment power is multiplied – The SMF loan is the only option that allows you to trade stocks with more leverage.
  • Non-liquidation of assets – To raise funds for stock trading, current assets do not need to be liquidated. As a result, it strengthens the holding power of clients.
  • Flexible repayment – If there is no Margin Call, no fixed payback is required. Every month, interest on the outstanding balance is capitalised.
  • Cash drawdown – You can take a cash withdrawal on your SMF loan after giving a 24-hour notice.
  • Hassle-free settlement – Saves your time by ensuring prompt trade settlement.

Bank Negara Malaysia (BNM) regulates traditional bank services, whereas the Securities Commission Malaysia regulates brokerage services.

It is not uncommon for two companies within the same company to provide their own SMF packages, with somewhat different terms and conditions. The SMF packages offered by banks and brokerages are comparable, but with some minor variances.

Are There Risks When Using SMF?

One prominent risk surrounding SMF that has been brought up in recent times is force selling. Essentially, this handy financing method can help investors turn a good profit in an upmarket.

However, when share prices start to drop, investors might face margin calls which means that they will be prompted to top up the initial investment in their accounts or start closing their positions and selling their shares. This leads to their accounts defaulting back to the minimum value.

If investors do not meet the potential margin calls, then it is possible that their open positions will be forcibly closed in a move that’s known as force selling.

Bursa Malaysia stated that they closely monitor trading activities involving margin financing, and that the marketplace is not very saturated with margin financing activities. However, large rallies can occur (such as the recent event in Malaysia mostly fueled by glove-related stocks) and the question of share margin financing being partly responsible for such rallies has been brought up.

Fortunately, certain measures have been put in place in order to mitigate the scenarios of force selling in the market. This way, investors’ interests are somewhat protected in terms of their shares for financing.

In Closing

Overall, Share Margin Financing can be a good alternative option for investors who are looking to distribute their portfolios and diversify against other conventional vehicles.

However, it’s important to do your due diligence and arm yourself with proper knowledge or consultation before venturing into new territory.

 

What are your thoughts on SMF?

 

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