They provide finance to buy investments with the security for the loan being the investments made.

For example an investor might put in a one third deposit and borrow two thirds of the money they wish to invest.

This 'gearing' has the effect of multiplying returns.

In this case, if the investments increase in value by 10 per cent the return on the deposit outlaid is 30 per cent.

However, if returns are negative they are multiplied too. It is a higher risk strategy.

There is also interest to pay on the loan, though it is tax deductible, reducing the net cost.

With investment prices reduced sharply by the Covid crisis now is an excellent time to invest.

Values are starting to recover and should continue to over the next year or two.

Margin loans can allow people with limited cash available to start with a small deposit.

It is even possible to start with just a monthly savings contribution, to which is added a monthly borrowed amount.

This is instalment gearing.

Managed funds and shares already owned can also be used as loan security, with borrowings used to increase and diversify the portfolio.

Margin loans suit borrowers with secure jobs and reliable incomes, who have surplus cashflow that can be used to pay interest and add to investments.

At present up to half the shares in the market are undervalued with strong growth potential as the economy recovers.

Some companies also have sound prospects of growing their profits in future years which should underwrite rising values.

Undervalued shares include major, well-known companies. There are the four big banks, some miners including BHP, Sydney Airport, Qantas, property companies Stockland, Cromwell and Charter Hall, Amcor, AGL and Macquarie Group.

Managed funds run by professional managers offer an easier and safer choice, investing across many stocks.

Some funds invest in Australian shares, some in international shares, and some in property and infrastructure.

Diversification reduces the risk of geared investing. Margin lenders lend to different levels against various investments.

Borrowers should ensure they aren't borrowing to the maximum allowed. If values fall they may be asked to pay in more cash, a margin call.

Margin loan interest rates start from about 5 per cent at present. After the benefit of the tax deduction the net cost is around 3 per cent, a low hurdle for the investments to beat. Interest can be pre-paid in June for the next year with the deduction claimed in this year.

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