I am going to talk about my opinion about share loan or margin facilities on this post today. These are loans that are given by banks to stock traders. I will call them traders because they have to do short term tradings to be able to make appreciable returns, they do not really invest. The banks require that anybody who wants to take a loan to trade in the stock market should put down some shares in some selected stocks as collateral, which are usually blue chip stocks (also highly capitalized securities) and the money they are given can also be used to buy only certain blue chip stocks. Now, there is usually this caveat that they place on the agreement that the loaned money should not exceed 60% of the portfolio. Some go as high as 70%. When this happens, the banks will be forced to sell out of the stocks without the permission of the beneficiary to cover up this margin. This situation is called margin call.
The month of May was quite turbulent for lots of stock investors as the share prices of many companies came plummeting. The stock market indices are hitting an all year low and highly capitalized stocks seem to be the worst hit. The low cap stocks have not been spared either but they seem to be safer at the moment, especially if they have good valuations and solid price earning multiples.
The high cap stocks have not done too well this bearish season because the performance of the market over the past few months have affected stock traders who took share loan facilities from banks. Now that the blue chip stocks have been affected by the slow down in the market, the banks have been forced to sell the stocks of such traders, which are high cap stocks that they used as collateral, in order to make up the percentage margin which they agreed on at the beginning, which has led to a vicious cycle. As they sell, the prices are forced down further as a result of excess supply and then it affects some other traders who also have to get out.
Whew! What a crunch!
I wanted to take a share-backed facility at the beginning of the year but when I saw the banks telling me that they will only allow me to select from a list of very limited number of stocks that included the likes of GTB, RT Briscoe, Total, Guinness, Zenith Bank, UBA, etc as my collateral and then to also restrict myself to this list when I want to buy, I was like what?! They are solid companies and are not likely to crash anytime soon but if I have to take a loan for just one year with 19% interest plus all those little charges that will add up to 25%, I do not want to be investing defensively in stocks that will end up giving me just 5 - 10% after a year with dividends and bonuses. I will have to go in aggressively for serious capital appreciation. Those companies are good for the long term investors who just want to buy with their own money and go to sleep. You cannot invest in stocks with money from the bank and then sleep with both eyes close. One eye has to be on the portfolio 367 days in a year. We all know that the fantastic returns that we get from the stock market are not provided by these blue chip stocks.
Whatever happened to the likes of C&I Leasing, Deap Capital, Sterling bank, etc? They are not high cap stocks but they make a lot of sense fundamentally. I wanted to make the loan just 10% of my portfolio so that the risk would be well covered and I wanted to buy C&I Leasing then at N7.00. I was told to choose out of UBA, Ecobank and co. Either that or no deal. I was infuriated and I left. I went out, sold all my holdings in Dunlop then and dumped everything in C&I Leasing. I was able to sell after 6 months at a 100% gain and where is UBA? It was N48 then and it is N60 now. Just 30%.
The lists these banks give prospective margin traders are good companies but they are not likely to give returns that will make stock traders happy. In my own candid opinion, if you want to play the stock market or invest without unnecessary stress, it is better to steer clear of bank loans. Use your own money and invest strategically with a well defined objective.
Another thing to also put at the back of your mind when you want to enter the stock market is not to put all your life savings into it, not to talk of adding extra luggage from the bank, as the market is known to go up and then DOWN