Want to expand your investment into US and Hong Kong stocks? Here’s how share financing can help you do that
The trade war between China and the United States and its global repercussions have presented a number of new investment opportunities as stock markets see increased volatility.
For instance, stock indices in Hong Kong and the US, like the Hang Seng Index, S&P 500, NASDAQ Composite, and the Dow Jones Industrial Average have been reacting to the US President Donald Trump’s continued rhetoric on the US-China trade war in recent months, coupled with the fresh round of rate cuts by the US Federal Reserve.
Investors might see an investment opportunity among US and Hong Kong listed stocks that have become undervalued, but what if they lack the ready cash to invest because their money is tied up in other investments? Then this is where share financing can help, by enabling investors to utilise their existing share investments to help fund their new investments, without selling any of their shares.
Here’s what you need to know.
What is share financing?
Share financing is a means for investors to invest by pledging their existing shareholdings for more purchasing power, without liquidating their holdings.
Like a form of margin trading, share financing not only helps you unlock the value of your shares for more investment, it also provides you with leverage so you can invest more with the same pool of investible funds.
Here’s how share financing works
Let’s take the example of an investment in a Singapore-listed stock for a start. Perhaps you are interested to buy $100,000 worth of shares in OUE C-REIT. You could choose to pay $100,000 in cash for the shares or you could choose to pay with it using some form of leverage to reduce your cash outlay.
Typically, your broker would provide you with leverage of up to 3.5 times the cash you put up. In order to buy $100,000 worth of units, you might only need to fork out $28,600.
What if you don’t want to use your cash at all? This is where share financing comes in.
Share financing takes the Singapore listed stocks you own as collateral, and provides you with a loan to invest in other Singapore stocks.
Leverage on your stock holdings would typically be up to 2.5 times the value of the shares you put up as collateral. As another example, if you are planning to invest in Sembcorp Marine, you can invest in $100,000 worth of Sembcorp Marine shares by pledging $40,000 worth of shares you already own, like SingTel.
$100,000 worth of Sembcorp Marine shares
= $100,000 cash
= $28,600 cash with leverage
= $40,000 worth of marginable shares
DBS is currently offering its share financing facility at a promotional rate of 3.25% for your investment in Singapore markets, if you open an account before the end of the year.
Assuming you only loan the $100,000 over a period of 10 days, that means your investment in $100,000 worth of Singapore listed shares would incur an interest of
$100,000 x 10/365 x 3.25% = $89
As a savvy investor, you would know how important it is to keep your costs low in your investments, so a lower interest rate is always a good idea.
DBS share financing also provides you with the flexibility to finance your Singapore market investment through any broker of your choice.
How can share financing help me invest in US and Hong Kong stocks?
Going back to the earlier discussion about investing in US and Hong Kong stocks, DBS Share Financing facility now offers financing for Hong Kong and US markets.
If you open an account before Dec 31, 2019, you will stand to enjoy the promotional rate of 3.99%. However, you will need to use your DBS Vickers Online trading account to access this option.
This facility is not limited to shares either. You can also finance and invest with exchange traded funds (ETFs).
To know if your shareholdings are acceptable, you can check the lists below.
- Singapore Marginable Securities List, including ETF (Set 1)
- Singapore Marginable Securities List, including ETF (Set 2)
- Hong Kong Marginable Securities List
- S. Marginable Securities List
What’s more, this facility also allows you to draw out cash worth up to 70% of the value of your shareholdings, which could ease your cash flow needs.
Understanding the risk of leveraged trades
So what is the catch?
Share financing involves leveraged trading, which can increase your trading profits in relation to the capital that you invested at the start. However, the opposite is also true. If the market moves in the opposite direction of your expectation, your losses would be much greater as well.
What happens when your investment makes a loss? That would depend on how much margin you maintain in your margin account.
When trading with leverage, you are required to maintain a certain amount of equity in your margin account that will be used to buffer your losses. In the earlier trading example, your margin would be calculated like this
Minimum Margin requirement = (Value of marginable shares / loan amount) x 100 = 140%
In order to support a loan amount of $100,000, you would need to maintain $140,000 worth of marginable shares, or other acceptable forms of equity like cash in your margin account. And that is just the minimum margin.
As soon as the market goes against you, or if the value of your marginable shares falls – causing your margin to fall below 140% – you would experience a margin call. In which case, you would need to top up your margin account with cash, or pledge more shares, or be required to sell some of the shares in your margin account.
Ideally, investors should maintain a margin of closer to 200%, to act as a buffer against market volatility.
Who can apply for DBS Share Financing?
This facility is open to Singapore citizens, Singapore PRs and foreigners who are between the age of 21 to 75 years old. It is not available for US Tax person and residents in the European Economic Area (EEA).
Existing DBS account holders can open a DBS Share Financing facility easily through DBS iBanking, while new customers can apply online here or approach a DBS relationship manager to open the account. The account opening will take 3 working days, and investors will need to arrange for their collateral to be deposited into the account before they can start using the financing facility.
Find out more about DBS share financing now.