Borrowing to invest in shares
|
INVESTOR PROFILE |
|
|---|---|
| Outlook | Positive |
| Risk Profile | Medium - High |
| Time Frame | Medium - Long |
Borrowing to invest or ‘gearing’ has become a widely accepted way for Australian investors to invest in shares. Similar to property investors putting down a deposit and borrowing the balance, gearing though your MQ Prime Facility allows you to buy shares with as little as 5% as a deposit.
Gearing allows you to take advantage of investment opportunities you couldn’t otherwise access. This is because with more funds at your disposal you have the ability to purchase shares as the opportunity arises. Gearing also gives you the potential to increase the size of your returns by investing significantly more than you otherwise could. However, gearing also increases risk because it will magnify any losses.
Using your MQ Prime Facility for gearing is highly flexible as it enables you to customise your gearing level to match your risk profile.
Benefits of Gearing
Increase the size of share investments
Borrowing to invest allows you to significantly increase the size of your share investments. This will give you a greater exposure to growth potential, dividends and franking credits.
Diversification
Having more funds to invest means you have the ability to increase the range of shares in your portfolio. By investing in a broader range of shares you can spread your exposure and reduce your risk.
Potential tax benefits
You may be entitled to claim loan interest as a tax deduction where the funds are used for business or investment purposes. Additionally you may also be able to claim the following 12 months interest if you make an interest prepayment prior to 30 June*.
The following case study demonstrates how gearing in your Prime Facility can potentially magnify the returns from your investments.
Case Study – using MQ Prime to gear into shares
You should note that this example is illustrative only. It is not a recommendation to make an investment in any share and should not be taken as personal advice. With a MQ Prime Facility, you are responsible for selecting the share for any share position you take out. As such, the performance of any share position will depend mainly on your own investment decisions.
Jeff has saved $100,000 that he would like to invest. After careful consideration, Jeff decides that he would like to invest in a portfolio of shares as he has a long term positive outlook for shares. Jeff has a moderate risk tolerance and decides to use a gearing level of 50% using his MQ Prime facility.
Jeff deposits $100,000 in his Cash Account and proceeds to purchase a $200,000 portfolio of shares.
Over a year Jeff’s share portfolio has increased by 10.0% and he has received an average dividend yield of 3.50%.
The table below shows how Jeff’s Prime facility geared at 50% has helped him build more wealth compared to investing without gearing:
|
NO GEARING |
50% GEARING |
|
|---|---|---|
| Intial capital |
$100,000 |
$100,000 |
| Borrowing via Prime Funding Account |
|
$100,000 |
| Share Investment |
$100,000 |
$200,000 |
| Share investment at the end of year |
$110,000 |
$220,000 |
| Dividends |
$3,500 |
$7,000 |
| Franking credits |
$ 1,500 |
$3,000 |
| Interest expense |
$ - |
$8,750 |
| Taxable income |
$5,000 |
$1,250 |
| Tax on taxable income (after franking credits) |
$925 |
-$2,394 |
| Porfolio value at end of year |
$112,575 |
$120,644 |
This example assumes 10.0% capital growth and a 3.50% pa fully franked dividend yield. Interest is 8.75% pa and tax is paid at 48.50%. Analysis is before Capital Gains Tax and any fees.
It should be noted that if the value of Jeff's share investments had decreased instead of increased during the year, the 50% gearing would have increased the size of his losses.
* Macquarie does not give tax advice. Any tax discussion is based on laws current at the time of writing, which may change. How tax laws apply to you depends on your circumstances and you should seek professional advice before investing.
Due to recent rebranding of our products, we now use the term "MQ" in place of "Macquarie" in all marketing and informational material concerning our CFD, Prime and Cash Account products (except where we refer to a Macquarie company). For example, we now use "MQ CFDs" rather than "Macquarie CFDs". Please note that this rebranding has not affected the substance of the products in any way and they remain issued by Macquarie Bank Limited.
MQ Prime can be high risk and is intended for experienced investors. Consider carefully whether a MQ Prime Facility, MQ Prime Cash Account and/or a MQ CFD account, each issued by Macquarie Bank Limited ABN 46 008 583 542 are appropriate for you; talk to a financial adviser; and before investing read the relevant product disclosure statement available from www.macquarie.com.au/prime. Information is current at 5 February 2008 and may change without notice.
