Friday 5 December 2014

Buying on margin is a bad idea, including for employees

I wrote before:

"Bumi Armada is especially painful since the stock is not only trading way below its IPO price, but also below the price of its recent rights issue. Also, there seems to be persistent insider selling, even recently at these lower prices."

Today Bumi Armada announced:

"The Disposals were undertaken due to Margin calls on loan facilities taken by Mr. Hassan Assad Basma to purchase the said shares."

At least that makes clear why the CEO of Bumi Armada was selling shares at such a low price (RM 1.02, only a fraction of the IPO price, corrected for the recent rights issue).

But surely the management of any listed company should know that buying shares on margin is a hazardous thing to do?

Interestingly enough, I wrote about this same issue before, that time on Astro, from the same stable of companies:

"Last week Astro had a town hall meeting with their staff to talk about the share price fall and it is really up to the company to handle the situation because no organisation will like to have a group of disgruntled employees. There may be the pressure of margin calls for those who had taken financing to buy their allotment of shares. There might be employees who might not have the ability to hold on to their shares."

I am quite astonished about this all, it almost looks like certain employees are encouraged to buy shares of their company on margin. But that sounds like horrible advice, surely that can't be right. What will the mood of the employees be when the shares tank and they are forced to sell their shares, as now has happened?

I think the authorities should look into this issue.

1 comment:

  1. The temptation of buying on margin is great. Employees are allotted a lot of shares at listing. When there is a rights issue, banks are keen to provide financing. And why not, these are usually lenders with sound repayment abilities.

    This could be a problem for margined employees when their share tanks. This could of course go the other way; margined employees earn small fortunes when share prices rise.