First up, this is more for sophisticated investors who understand the risks of margin and is not suitable for everyone, even though margin financing for shares is fully legit and well-regulated in Singapore.

This is because

“Margin multiply returns,
but it also magnify losses!”

What is “optimal leverage”?

Just like how you deploy leverage in the form of a mortgage to invest in a property, with loan-to-value (LTV) of 75%, a 25% increase in property price will see you reap a 100% return on your capital.

To apply leverage to volatile stock trading, you’ll need to make it safe with two simple rules.  We call this optimal leverage and that’s the only way to trade safely with margin in our view, which is exactly what this account does:

Rule 1: A 1x leverage (akin to LTV 50%)

Rule 2: Buy only blue-chip stocks

With a 1x leverage, a 25% increase in price will see you reap a capital gain of 50%, plus you’ll also double your gross yield in a portfolio of income-generating stocks, i.e. earn 10% gross dividend yield before interest costs, instead of the typical 5%.

However, the reverse is also true where a 25% drop in price will destroy your capital value by half!  If you choose to liquidate at that point.  So those who wish to boost returns by using margin must have the holding power not to sell at all times.

With only a leverage of 1x, you’ll need a crash of more than 37.5% from your entry price to trigger a margin call.  It’s much safer than the typical margin account in the market which lets you buy up to 5 times your capital.

Depending on your entry price, blue-chip or big-cap stocks do not often crash more than 35% during most market corrections, though not totally impossible in extreme market meltdowns (eg. GFC, Covid).

You just need to be aware of the risks and stand ready to top up your account with other sources of funds in event of margin calls, even with the use of optimal leverage.