Margin Trading Dangers Highlighted by Real Cases

Margin Trading Dangers Highlighted by Real Cases


Several recent high profile company share price collapses on the Australian Stock Exchange highlight the danger posed to ordinary shareholders from large scale margin trading of shares by directors of listed firms. So dramatic have been the consequences that no equities investor can afford to ignore the lessons.

Significant shareholdings by directors in a listed company have traditionally been viewed favourably as an alignment of executives' and other private shareholders' interests, but this ideal can be dramatically compromised in cases where those large shareholdings have been aggregated through, and remain security for, margin loans. Directors leveraging into positions well beyond their capacity to meet margin calls may create a known and acceptable risk for themselves but their actions inescapably also create a significant but hidden and usually unsuspected risk for other shareholders.

On exposure in a falling market, the consequences can be devastating to all concerned.

Basically margin trading involves borrowing through a brokerage to purchase shares on deposit with the shares purchased being held as collateral for the loan. As with all leveraged investments the potential for both amplified profits and losses exists, but particular additional risks attach to margin trading of shares.

Depending on the particular share being purchased and subject to other margin account criteria such as maintenance of a minimum balance, a private investor may be able to borrow, say, 50 loan to collateral value must be maintained at all times - hence a 50, owing to the director's perceived influence on the company and the scale of business such a purchase will bring to the margin broker. Thus the director's margin is only 20 of the purchase price of one million $10 shares through a margin broker. Borrowings amount to $8 million with $2 million "equity" being put up by the director to complete the $10 million purchase. Furthermore, the margin trading agreement states that a minimum 80 to a market value of $9 per share will reduce the director's holding of 1 million shares to a value of $9 million, but still carrying the $8 million debt and therefore breaching the 80 loss) will then be served with a "margin call" for a further $1 million to re-establish the original loan/asset ratio. Failure to meet the call will invoke conditions allowing the margin broker to sell some of the holding to re-establish the required 80 in the $10 share price to $8 would see the director's initial $2 million equity wiped out altogether and, in the absence of any margin call being met, the broker would very likely dump the entire holding at best price to minimise losses. Apart from sheer pressure of volume, attendant negative publicity through stock exchange disclosure requirements would probably see the company's share price devastated even though the company may remain as a viable enterprise. Any shortfall in recovery by the broker through sale of shares held as collateral would remain a liability against the director.

In this situation private shareholders become unsuspecting victims of a risk they didn't even know existed.

This scenario is far from academic. In a number of now salient Australian cases, dumping of directors', executives' and related party holdings have indeed seen share prices slashed, stock exchange listings suspended, directors and executives lose their jobs with their entire company shareholdings wiped out. Residual personal liabilities are suspected of being huge in some cases. Consequently, private investors have also suffered massive write downs in the value of their own holdings.

Needless to say, any company subject to such a fate will find it nearly impossible to raise fresh equity capital and will pay heavily for debt - particularly in today's credit crunched world. Assuming the enterprise can remain solvent, aggressive sale of assets becomes the most logical choice to fund a restructuring program.

Private investors engaged in margin trading the same company may well suffer a similar fate to the directors, albeit without a loss of employment.

A more detailed case study is available through the resource link.

As the case study points out, effects of a major margin call default can be widespread and devastating, seriously affecting even secured investors in related companies.

So how should the private investor guard against such an unwelcome outcome to a seemingly quite reasonable investment?

As we have discussed, potentially damaging margin trading by directors and executives can be difficult to detect, but some clues may be available through stock exchange announcements. Better still, just ask the Company Chairman through private correspondence or at the Shareholder's Annual General Meeting. Companies able to report a clean slate in respect of such activities are likely to be happy to do so. Investigate the others.

In one recent case it turns out that not only were directors purchasing shares on margin for their own accounts but were also margin trading other listed shares with shareholders' funds in the Company's name. Needless to say the Company and its shareholders soon lost many millions of dollars once markets suffered a modest reversal.

For the private investor, good advice is to avoid margin trading through a margin broker altogether. This, however, does not completely exclude the leveraged purchase of shares which remains a valid investment strategy under certain circumstances. It does, however, place vital separation between financier, sharebroker and shareholder.

In one recent Australian margin trading case, some private investors reportedly had their entire nominee-held share portfolios seized and sold to recompense the margin financier, a major bank. When the margin brokerage house collapsed, private investors were left as unsecured creditors of the failed broker. Prospects of recovery from this position would be dim indeed.

At a time when ever more complex means of trading traditional share markets are being developed, such as options, short selling, stock borrowing and margin trading, investors need to recognise that new opportunities for exceptional profit also bring exceptional new risks. Some may well be hidden behind a cloak of "immateriality" even though potential consequences could be disastrous.

In summary, private investors can minimise exposure to margin trading risk by taking a few precautions:

" Treat very fast growing companies with caution. These companies and their high profile directors seem most susceptible to the allure of big rewards offered by serious margin trading while overlooking the exceptional risks posed to both themselves and others.
" Examine available stock exchange announcements and news to unearth margin trading practices relating to major shareholdings, including those of directors, executives and related parties. These may be difficult to find and interpret, but they do exist.
" Simply ask the Company Chairman if Directors and Executives or even the Company itself, is involved in margin trading the company's own shares - if the answer is yes, stay away.
" Also ask if shareholders' funds are being used to margin trade any other company's shares - hidden danger lurks there too.
" Avoid personal use of margin share trading accounts altogether - borrow elsewhere if you intend to use leverage for share purchases.
" Ensure any shares you purchase on leverage are registered in your own name to avoid the possibility of seizure by a higher ranking creditor should your sharebroker's business collapse.

Eventually disclosure of margin trading by company directors, executives and related parties may become mandatory under stock exchange listing rules, but until that time equity investors will need to include "margin trading risk" as yet another factor for their own determination.


Check out our Stock Trading System

Silver Jewelry - 5 Different Meanings on Wearing Them

There are people who are fond of wearing gold jewelry. But there are those who also find it appealing to wear silver jewelry. Well, as with wearing gold jewelry, wearing silver versions may also reflect your personality.

People may give several meanings to the fact that you wear silver jewelry. You may also have your own definition on why another person wears a piece made of silver. Well, every individual may have his own interpretation on silver jewelry wearing but the truth is the choice of owning one is more of a reflection of who you are. From there, five different meanings of wearing silver jewelry can be derived.

# 1 - Wearing silver means that you are not an avid fan of gold
Gold is one of the most classic precious metals used in the making of jewelries. Classic as gold jewelry can be, you may not be a fan of the precious metal. You think that wearing silver jewelry is better than getting pieces that are made out of gold.

# 2 - People who wear silver means they want to fit in the crowd
As mentioned, gold jewelry is more traditional than silver. In fact, if you try to recall Hollywood stars walking via the red carpet, you will notice that most stars of today wear silver. If celebrities wear these magnificent pieces, then you will also be enticed to wear one.

# 3 - Wearing silver means that you want to be as simple as possible
You have always heard the famous phrase "simplicity is beauty". Well, the same is true when it comes to wearing silver jewelry. Although, these pieces are available in different sizes, forms and shapes, simplicity is a quality that stands out when speaking of silver jewelry. In fact, the simplicity of these pieces also reflects elegance. This being said, you can captivate the eyes of people who notice that you are wearing one.

# 4 - Wearing silver means that you are more of a family person
What does that mean? Well, being a family person means that you care more about the needs of your family. You wear silver jewelry because wearing gold jewelry may mean more expense on your pocket. Silver jewelries are available in different materials and most of them can be purchased at an affordable price. Rather than spending for a pricier gold or diamond jewelry, you will choose to spend on a price-friendly silver jewelry.

# 5 - Wearing silver means that you are confident about yourself
You do not have to be a Hollywood star to be able to wear silver. What matters is you have the attitude to flaunt the pieces without actually being boastful about it. It also means that you do not need to brag about wearing 24-karat gold just to get recognized in a crowd. Wearing silver jewelry will make you look as stunning as others who opt for gold and diamond versions.

Wearing silver means that you are modern, cool and confident yet simple and more family-focused. Start by investing on one today and wear it to show the real person in you. Choose from a wide array of options like sterling silver and high fashion silver. Surely, you will find one that will reflect your own style.

If you are looking for jewelry that will best suit you, simply explore your options via bulldog jewelry.

I found beautiful Sterling Silver Jewelry at this fun website!

Cleaning your hearing aids

Hearing aids which fit in the ear.

When removing your hearing aid before you go to bed you should carefully wipe down with a soft dry cloth or tissue. You should also spend some time inspecting the part of the hearing aid that fits into the ear canal as it is likely that a accumulation of ear wax may have occurred. If this is the case then you will have to remove the wax. When you purchased the hearing aids you should receive a cleaning tool which can be used to do this which usually takes the form of a wire pick or a brush or you could also use a toothbrush.

Hearing aids which fir behind the ear.

As with the above, the procedure is similar. However, the main difference being that the ear mould which fits into the ear which is usually made of Lucite or silicone which is non-electrical and therefore can be washed in mild soapy water. Before washing it is important to ensure the earpiece is disconnected from the behind the ear section to ensure the electrical part of the hearing aid does not get wet. Dry the ear piece correctly before using and also ensure that the tube is clear of water. Please note that the tube may need to be replaced after a period of time usually 3 to 6 months as the flexibility may be lost.

Things not to do…

1. Wash the hearing aid with solvents or alcohol as this may cause the materials from which the aid is made to break down. You can purchase special cleaning fluids designed to clean hearing aids.

2. Don’t let the electrical part of the hearing aid get wet. Avoid wearing the aid when showering of bathing.

3. Try not to drop the hearing aid, especially on a hard floor as this may cause the hearing aid to break.


Hearing Aid Styles

How To Clean Hearing Aids

Why Alcoholics Need Support

Alcohol consumption can relax one for while. Many people consume alcohol in order to escape tension and depression. With continuous alcohol consumption, the person gradually develops a tolerance and dependence on it. The long-term use of alcohol in large quantities can cause addiction. Alcoholics usually do not realise their growing problem and addiction to alcohol intake.

Alcohol consumption can have several negative consequences; alcoholics often find themselves in serious trouble due to their abnormal state of mind. Alcoholics usually do not admit their problems and also refuse to accept the reality. It might take several severe consequences for the alcoholic to realise how damaging alcohol is for him/her.

Even when an alcoholic realises his/her problem, he/she needs some time and support to take a step to correct the issue. The body of the alcoholic needs a specific amount of alcohol as it becomes dependent on it and craves for it. Alcoholics find it very hard to resist the temptation and face severe withdrawal symptoms as a result. Also if an alcoholic wants to quit, but his/her friends drink, then he/she cannot get rid of the habit.

Due to severe withdrawal symptoms the alcoholic faces extreme physical discomfort; therefore, quitting the habit on their own is very difficult. They need assistance and support to get over the problem. No one can force an alcoholic to leave the habit. Also the disease and addiction of alcohol makes the person lose hope and give up trying to quit the habit. The addiction makes the alcoholic lie, react violently, steal and do everything possible to drink alcohol. For an alcoholic, admitting the problem and talking to others about it is the most difficult thing to do, but it is also the first step for recovering.

Counselling is the major support needed by an alcoholic to prevent and treat the disease in time. The support that counselling provides help them know the reason as to why they drink and then find ways to treat the problem. Involvement of friends and family is the basis of family therapy which is a very important part of alcohol treatment.

Support of family and friends, helps an alcoholic live without alcohol. Alcoholics often try different ways to quit the drinking habit and if they do not have motivation, confidence, strength and encouragement, they go back to their drinking habit.

Fear that they would never get over the addiction to alcohol holds the alcoholics back. They feel very uncomfortable when dealing with the life changing decision to quit alcohol. It is very important to be supportive and helpful towards them.

Support plays a very important role in helping an alcoholic recover from the disease by letting him/her know that people do not judge or label them, they care for them. Support helps the alcoholic know that there is help available for them and they can deal with the problem. Support affects the behaviour of the alcoholic in indirect ways; therefore, it is very important.

Contact a specialist today for the treatment of alcoholism and take professional assistance.

Living with an alcoholic is a very fragile existence, the relationship always undermined by a breach of trust or a potential breach of trust. Find out at http://www.livingwithanalcoholic.org on how to deal with it.