Investment News

Make the Most of Your Borrowed Money By Investing In Shares

Publish date: Tue, 26 Nov 2019, 08:24 PM
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General investment news and blog posts

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Not all lending institutions such as banks would openly let you borrow money to invest in the stock market. One of the reasons is that there is a risk that the money you borrowed will go down and you might not be able to pay back the loan. However, you can still get alternative funding from other lending institutions such as Mulligan Funding or the stock brokerage industry.

On a brighter side, getting a loan to invest in shares can be an effective way to boost your potential returns. But, you need to make sure that you are investing in the right shares that have high potential returns. If your investment increases at a rate that is higher than the costs of your loan, you can make an income out of it.

What kind of loan do you borrow?

The type of loan you need to get so you can buy stock shares is a margin loan or margin lending. Margin lending is like any other investment which offers high returns but also carries high risks. Many are attracted to it because there is a chance of multiplying your money and increasing diversification.

Though there is a chance that your money will multiply, you need to be extra cautious because not only could the value of your investment could deteriorate, but your loan obligation may increase if the market share takes a tumble.

It involves loaning money against the shares you own to purchase more shares. This can result in a portfolio where, depending on the lending institution, your borrowing range is between thirty to eighty percent of the value of your portfolio.

Your loan level will be set to buy shares up to the leverage level you specify. The interest and charges you need to pay are based on that sum. Most lending institutions set a minimum loan level for margin lending. For you to qualify for a margin loan, you just need to open a margin account with any stock brokerage firm.

Once you buy stocks in a margin account and the cost of the shares is greater than the amount in your account, the lending institution provides a margin loan to pay for the excess cost of the shares. Thus, a margin loan covers the portion of the cost that you cannot pay.

The Pros and Cons

In any situation, there are pros and cons to it. As a borrower and an investor, you need to make sure that the pros can outweigh the cons in it. Nevertheless, the more money you have invested, the more chances you can gain if shares in your portfolio go up in value.

Once the value of your shares increases, your leverage decreases as well. It gives you the capacity to borrow more. Aside from that, by having more money to invest in shares, you can increase diversification which reduces your downside risk.

The downside of it is the stock market volatility. If the stock market falls, the value of your shares will drop and you could be required to maintain the equity for the loan if your level breaches the minimum range. This is known as a margin call. A margin call involves selling shares at a loss or giving up-front cash payment. The proceeds of the said shares or the up-front cash payment will be used to pay down the margin loan.

Aside from that, the up-front cash payment or sell-off requires to be done within twenty-four hours. Unfortunately, if you cannot be contacted, the lending institution has the right to immediately sell down your portfolio.

For example, if your portfolio share is worth seventy-five percent of your loan and the stock market falls, you must give additional money to make sure that the seventy-five percent is maintained at all costs. Thus, any decrease in the value of your stocks will increase your obligation.

To prevent that from happening, you need to constantly monitor your margin lending investment.

What Should You Maintain?

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You need to closely monitor the equity of your account because if the value of your stocks will fall, your equity will also fall. For example, you bought $20,000 worth of stock using $10,000 of equity. If the value of the stocks dropped to $14,000, you would have $4,000 in equity with the $10,000 loan still outstanding.

Once you drop below the minimum percent set by your lending institution, you need to add more money or sell some shares from your account.

Paying back what you borrow

As long as you maintain the equity above the minimum percent set by your lender, there is no need to immediately pay your margin loan. If your stocks increase in value or you add cash to your account, you can buy more stocks and increase the size of your loan.

If you want to decrease the interest that is charged to your loan, you can choose to pay down the loan at any time using the proceeds from stock dividends, additional cash, or selling some of your shares.


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