APEX E-TRADE

tech trader — Mon, 10 Oct 2011 12:03:31 +0800

My friend have been asking me about collateralize trading account.So I am starting this new topic as an explanation.

As I know off the collateral can be used in 2 ways either for collateralize trading account or for the margin financing trading account.

For the collateralize trading account, if we put in collateral either in cash or shares form, then we are granted extra trading limit compare to the usual kind of account where we have to depend on the remisier limit.

For the margin financing account, the collateral act as a security some sort for them to grant a loan for the purchase of shares. If we have margin financing account, as long as we are purchasing shares within the limit granted, we do not need to pay to pick up the share, its covered by the margin financing facilities. But there is a cons like if the collateral that we placed inside the account especially shares have dropped in value(they are valued on a daily basis to the last closing price) then the stockbroker may issue a margin call as the collateral not enough to cover the facilities granted at certain stage according to the Bursa Rule.

The margin financing trading account falls under the category of providing loan and as such there is interest charges. I have checked around the market, some of the investment bank offered cheaper interest rates but there's some cons too ie its not easy to get the facility with them as they conduct more rigorous checking compared to smaller broker. They do check on the background such as loan repayment record with other financial institution.

Other factor to be considered is the value that the stock broker will give to the collateral pledged or deposited.

For investment bank, they have rigorous method in giving value to the shares collateral ie such as underlying fundamental support of the counter price and also the past record of the price of the counter. For example a counter is currently traded at RM0.71 but the investment bank may only value the collateral at RM0.35.
This is due to the reason maybe the counter price for the past many month have been in yo-yo swing like from RM0.25 suddenly jumped to RM0.71. They are afraid that the price would like a yo-yo dropped back to RM0.25. So they would capped the price at RM0.35.

This is the example of the calculations;

Say you deposited 1,000,000 share of counter A as collateral, and the investment bank capped at RM0.35 although currently the share is trading at RM0.71. Calculation would be ;

1,000,000 x RM0.71 = 710,000(based on market price)
1,000,000 x RM0.30 = 300,000(based on capped price)

RM300,000 would be the value of your collateral placed with the investment bank although if based on current market price, it would be RM710,000. The trading limit and amount of facility granted under the margin financing facility would be based on the above.Some investment bank don't accept the pledging of shares from one counter/one board only, they prefer combination.

Certain stockbroker give better value on the share collateral especially non investment bank. This is due to the reason the margin financing account is already secured so maybe a better valuation are given to the collateral. They would based on percentage, ie;

1,000,000 x RM0.40 = RM400,000(based on 56% of the current market value)

If anyone have experience like the above, please share.

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tech trader — Thu, 30 Jun 2011 08:57:42 +0800

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APEX E-TRADE

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