Trading strategies
Macquarie Prime is a flexible online trading and investing facility in which a variety of strategies can be applied depending on the needs of the individual investor.
Growth
Using shares to increase your wealth
ASX-listed shares can be bought and sold on the trading platform. You can borrow to invest in shares, with gearing between zero to 95%, depending on the applicable margin requirements. While you are deciding which shares to buy any surplus cash will earn a high rate of interest in your Prime Account.
Benefits to share ownership include:
Diversification
Liquid investment
Access to gearing
Borrowing to invest in shares
Borrowing to invest or 'gearing' has become a widely accepted way for Australian investors to invest in shares. Similar to property investors putting down a deposit and borrowing the balance, gearing though Prime allows you to buy shares with as little as 5% upfront.
Gearing is where you have investment exposure that is larger than the amount of cash you outlay. Gearing allows you to take advantage of investment opportunities you couldn't otherwise access. This is because with more funds at your disposal you have the ability to purchase more shares as the opportunity arises.
Gearing also gives you the potential to increase the size of your returns by investing significantly more than if you only used your own funds. Gearing, however, also increases risk because it will magnify any losses.
Using your Prime Facility for gearing is highly flexible as it enables you to customise your gearing level to match your risk profile.
Benefits of borrowing to invest in shares include:
Increasing the size of share investments
Diversification
Potential tax efficiencies
The following case study illustrates how gearing through Prime can potentially magnify the basic returns from your investments
With $100,000 in your Prime Facility and a gearing level of 50% you could purchase a $200,000 share portfolio.
This example shows the returns if the portfolio increases by 10.0% and has received an average dividend yield of 3.50% (assuming 100% franking) with an interest rate of 7.20% charged on any negative Funds Balance (due to gearing). You should note that had the share price declined, any loss would also have been greater. The example does not include fees and charges that may be payable.
Extract cash from existing shares
With its optional loan facility, Macquarie Prime allows you to maintain exposure to your existing shareholdings while unlocking cash to diversify your portfolio into other shares or investments.
Maintain share exposures
Diversification
Potential Tax Efficiencies
No capital gains tax implications
The following illustrative case study demonstrates how you might be able to unlock cash from your existing share holdings by transferring them into your Macquarie Prime Facility and electing to use a Loan Facility.
Consider you have a share portfolio that has grown to $140,000. After reviewing your investments you decide that your portfolio is overweight in a particular share. You purchased these shares when they were $18.00. They are now worth $30.00 and represent a large portion of your portfolio.
You can rebalance your portfolio and diversify your investments without selling any shares. One solution is to transfer your shares into your Macquarie Prime account. Transferring your portfolio will allow you to gear up to 90% against the value of your shares (assuming a 10% margin rate). $14,000 would be required as margin against your existing portfolio with the balance available for further investment.
You decide to retain your current exposure and free up cash to make other investments, giving you the ability to diversify your portfolio. In this example you could drawdown $126,000 in Available Funds against the value of your shares. This $126,000 can be used for other investments such as buying more shares to diversify your portfolio.
Income Strategies
Returns on investment can be generally divided into two parts - capital growth and income.
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Capital growth can be defined as the value of the investment growing in size
i.e. a $10 share increasing to $15 has $5 of capital growth. -
Income is a regular return that is earned from the investment
Examples of income return are interest received on a bank account or dividends receive by shareholders.
The following two strategies focus on how to enhance the income on your investments with Macquarie Prime.
Dividend Yield Play
The Macquarie Prime Facility can be used to enhance dividend yield and potential franking credits.
The basic principle of leveraging into dividends is to buy a share before its ex-dividend date, hold the position at risk for 47 days (under the "45 day rule"1), and then sell it after the stock goes ex-dividend. The objective is to pick up the dividend, as well as any franking credits attached to the dividend.
Example scenario
Enhance income from short positions
A key feature of Macquarie Prime is that it is simple to open and hold a short share position.
In times of flat or falling markets, investors looking for alternative ways to enhance income can use their Macquarie Prime Facility to earn interest on cash generated by short positions.
Cash that is generated on short positions will be paid into your Funds Balance. These funds could be used to either offset the funding of long positions (if you have a loan facility) or earn interest if you do not have a negative Funds Balance.
Earning income from short positions in a share is a popular strategy for short to medium term investors who have a neutral to negative view on that share.
Example scenario
Risk Management
Strategy one: Protect your shares with a GSL
This strategy shows how to protect your shares from the stockmarket gapping through a stop loss.
Stop Loss Orders are a popular risk management tool. A common shortcoming of Stop Loss Orders, however, is that they do not offer complete protection when the market moves suddenly or 'gaps' through the Stop Loss Level.
A popular alternative to the traditional Stop Loss Order is a relatively new feature called the Guaranteed Stop Loss (or 'GSL'). A GSL will protect a share position by guaranteeing a worst case exit price during the term of the GSL. A GSL can significantly reduce your risk because it cannot be gapped.
During the term of the GSL, the protection holds regardless of what happens to the share price* .
A key benefit of a GSL is that, while it protects your share position from a market move against you, it allows you to have all the benefits of the share position increasing in value. In addition to this, holding a GSL enables you to enjoy the following benefits:
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GSLs may be set as close as 1% from the current share price
This also acts to reduce the collateral required for the position to as little as 1%. -
GSLs can be amended at potentially no extra cost
Once a GSL has been set, if the share price moves, the GSL Level can be trailed behind the share price to lock in any profits. -
GSLs can be placed online with a new order or added to an existing share position
For existing share positions, you can use a GSL to cover for all or part of the position.
How do GSLs work?
A GSL on a long position will be triggered if the share trades at or below the GSL level. If the GSL is triggered, the share position will be closed-out at the prevailing share price and you will be paid a GSL Compensation Payment. This GSL Compensation Payment equals the difference between that prevailing share price and the GSL Level, guaranteeing you a 'worst case' exit price, regardless of where the shares are actually trading.*
Example scenario
This example illustrates a holding of shares that is, a Long Position with a value of $200,000 and compares one scenario with a GSL at $19.80 to another scenario where no GSL is used.
If the share price suddenly drops to $18.00 the GSL would be triggered. You can see that with the GSL on a net basis the position is closed at $19.80, the GSL level: (taking into consideration the GSL Compensation Payment paid to you). The position without a GSL however, would be valued at the market price, in this case $18.00. In this example, the loss on the position is dramatically reduced by using the GSL.
You should note that this example is illustrative only. Actual returns may differ materially. The example does not account for tax or fees and other costs. It is not a recommendation to make any investment in any share, and should not be taken as personal advice. With a Macquarie Prime Facility, you are responsible for selecting the share for any position you take out. As such, the performance of any share position will depend mainly on your own investment decisions.
Strategy two: Using short CFDs to hedge your share portfolio
Share prices move both up and down. Investors who hold profitable share portfolios can be faced with the dilemma of when to realise their profits. Often an investor will hold a positive long-term view on a share in their portfolio but may think that, in the short term, the share price will remain flat or even fall. If faced with this situation, you may not want to sell as it may trigger a capital gains tax event.
Macquarie CFDs are a simple and cost effective way for you to protect the shares you hold in your Prime Facility against a downward movement in price.
A long position profits when a share price moves up and a short position profits when the share price moves down. If you have an equal quantity of long and short positions in the same share in Prime it doesn't matter what the price does - no profit or loss will be generated. You are said to be "hedged" against future share price movements.
Strategy details
This strategy involves entering an equal and opposite CFD position to your shareholding, for example, if you hold 539 shares you would open a short CFD position over 539 shares. The CFD position will neutralise your equity risk by giving you an equal but opposite exposure to the same underlying share.
The benefits of using CFDs to hedge include:
