What is Margin Lending?

Margin lending is part of investing in shares, although you can invest in shares without margin lending. What happens with margin lending is that you borrow money to invest in or buy shares with. This money is often offered by the banks and you are required to open an account in that bank with which to transact. The money you borrow is added to your own principal to buy the shares, but the bank controls them so they are not actually your own shares.

While margin lending is looking on by favour by some - including the banks that offer you the money – it can be quite risky. While you do stand to make a lot more money than if you only used your own money, you also stand to lose a lot more. The big problem is that if you borrow money to invest in shares and they lose value, you will lose money that you do not own.

The banks don’t want this to happen because it means they will lose money too, so they require you to keep a certain amount in your bank account to cover a possible loss. If the value of the shares falls below this you will get a margin call. You either have to put up the money to cover the loss or the banks will sell off the shares – at the worst possible time for you. Shares should be sold off when they are worth more than you paid for them, not less. Of course, if you pick well and have lots of luck with the share price rising, you do stand to make more than if your portfolio were debt free.