One of your clients, Mark has built up a large share portfolio outside of superannuation using margin lending. Mark has constantly increased the level of borrowing attached to the portfolio until he reached the maximum level prescribed by the margin lender. He says that this strategy worked well for a number of years, but he has recently been hit with a margin call. Mark has no other assets other than the portfolio and reveals to you that he is concerned about losing much of the capital in his portfolio. Mark asks you to explain the pros and cons of margin lending.

You are required to:

(a) Identify two (2) advantages and two (2) disadvantages of gearing.

(b) Describe three (3) ways investors can meet margin calls. Discuss which of these strategies Mark will most likely use.