The stock market has given high returns to investors over time. Since then, it has been an avenue to produce high returns but for relatively high risk. However, as you all know, the stock market fluctuates so there is always a high possibility that the value of your stocks goes down, and losses will occur.
It seems unreasonable to borrow money to invest in stocks since you need to pay an interest rate. However, if you look closely, you can make use of low-interest rates loans or small business loans to invest in high dividend-yielding stocks. You can use this loan, to make money.
Just make sure that before borrowing money to invest, you seek professional financial advice from experts to ensure that whatever strategy you will use is right for you.
If you think this is a good alternative to earn money, then why not try it. But, before this, you should understand the pros and cons of borrowing money to invest in stocks.
Here is the list of pros and cons that you should consider:
ADVANTAGES OF BORROWING TO INVEST
Get Returns From Money You Don’t Have
When you borrow money from lending institutions to invest in stocks that you cannot afford to buy with your own money, you are engaging in margin financing. Even if you don’t exactly have enough money to buy stocks, you can do it through getting a loan.
Getting a short-term loan to buy stocks becomes a simple process. Lending institutions will grant such loans if your stock portfolio becomes the collateral of your loan. Thus, lending institutions offer you a rate you can’t resist. Your stocks act as a collateral incase you can’t repay the loan. In that case, they will immediately sell off your stocks to regain the money.
If any amount is remaining from the sale of your stocks, it will be returned to you. One factor that can increase the number of funds you can borrow is the kind of share you invest in. The lower the risk of your shares, the higher you can borrow.
Alternative Option Rather Than Selling Your Current Shares
There may be times that you want to buy some shares because you are certain that it will perform well in the future. However, your means does not permit so.
To avoid selling your current share portfolio to purchase new stocks, you can make use of short-term loans or other loan options to purchase those shares you like. By placing your current shares as collateral, you can easily buy the shares you want.
Diversify Your Holdings
Another good thing about borrowing money to invest in stocks is you can diversify your portfolio. If with your current funds you can’t purchase as many shares as you want, you may want to consider borrowing.
For example, if you have $30,000, you can invest in a few companies. However, if you have $80,000, you have more options for shares to purchase.
DISADVANTAGES OF BORROWING TO INVEST
The Risk of Not Getting Any Returns At All
Entering the world of financing your stocks, means accepting the risk that you may not be able to get any returns at all. Even if you don’t get any returns, you still need to pay for the interest of your loan. Basically, you are obliged to pay the loan and its interest no matter what happens with your stock. Aside from repaying the loan, the shares you invested may not always deliver the returns you expect.
There may be times when some companies cannot pay out the return as expected because of many different reasons. For instance, the company may loose income or file bankruptcy. When these scenarios happen, the company may not be able to pay you the expected returns.
High-Interest Rate Risks
Whatever funds or money you borrow, it is expected that you also pay for the interest.It is the same for this type of loan. You need to pay the interest rate corresponding to your loan.However, there are times when your interest rates may rise.
Lending institutions offer enticing loan offers for your investment because you can guarantee your shares. You must keep track of your stock portfolio when borrowing funds and investing shares. Aside from that, your lending institution also monitors your account. Although you may enjoy slightly low interest rates and easy approval, there may be additional charges, including handling fees.