So, you want to enter the stock market but don’t necessarily have the capital. Taking out a loan to bankroll an investment can certainly be effective at boosting returns. That is, if your investment increases at a rate higher than the borrowing cost. But it’s a risky venture. The name of the investment game is debt.
With that said, the short answer is yes, it can be done. But the long answer is it depends. Taking on debt in the name of an investment can pay off if the risk is minimal, and it’s often done through banks and other standard lenders. But banks won’t agree to provide loans if they know you’re putting them in the stock market. Invest-a-loan primarily works when the risk is low and the return is high. It typically doesn’t make sense to invest in something that will mature well after repayment of the loan is due.
Beware of leverage
The key word in this scenario is leverage. It’s a dangerous word in the world of finance. Sure, it’s a fast way to build wealth, but the leverage accrued on your debt is almost like having a loaded gun. Put that in the wrong hands and you could be in the line of danger. Not only does it depend on your knowledge of the market and of finance, but on your outlook in the coming years. If the benchmark index looks that good to you, go for it. Invest in that diversified portfolio.
But make sure you’ve got an alternate source of income to pay the installments. Don’t make systematic withdrawals from the market. Choose strong stocks to avoid short-term capital gains. Hedge the investment with 20% with Index Futures and Gold bonds. Use the funds to accumulate stocks when major dips occur. Play it smart.
So, how do I go about getting a loan for investing in stocks?
Well, one way to do it is to take out a line of credit. But a loan may be the cheaper and wiser route. Of course, a personal loan interest rate will depend on how much is being borrowed, the terms, your credit rating, and whether you put up collateral. You can also borrow against your home equity with a refinanced mortgage or new mortgage.
Your best bet for your invest-a-loan in stocks, however, is to buy on margin. This allows you to borrow from a broker with a margin account instead of a bank. Your collateral will wind up being existing stocks you already own. You’d be able to buy more stock than usual and possibly make more money when trading in greater volume, borrowing up to 50% of how much the stock is worth. But at the same time your risk of losing more money is greater for the same reasons. You’ll still have an interest rate and you’ll still have to pay the loan back, whether you make money or not.
In the end, you need to make sure you’re comfortable going into debt knowing full well your investment may fluctuate. You need to ensure you can afford losing whatever collateral you use. You absolutely need to be sure you can repay the loan, especially if your investment fails. Keep in mind the loan terms, interest rate, any side fees, if commission is involved, and what any tax consequences may exist. Most of all, you need to seriously consider the risk versus the reward in this venture.