If you invest in the share market and let’s say you need money to invest and there is no other source of money left with you, in that case you can go for borrowing which is a good option.
So, here we are going to discuss how we can borrow money, what will be the rate of interest, what will be the limit of the amount of loan, what are all the charges it incurs and what will be the repayment method. To get answers to all these questions in detail, visit us.
Ways to Borrow Money to Invest in Shares
If we talk about loans, the very first thing to understand here is that banks will not give you loans so that you can use the money to invest in stocks as this is clear that the stock market is very unpredictable and can go down as well, in that case you may not be able to pay the loans back. In that case the Stock brokerage industry that works under the Securities Exchange Commission allows you to borrow money to invest in stocks and the stocks themselves serve as a collateral. Click here to invest with Groww.in
We are here with some ways that you can opt to borrow money for investing in shares.
1. Open a Margin Account
One of the simplest options is a margin account at brokerage. A brokerage will lend some value at a specified interest rate to an investor depending upon the existing investments in the account. The account requires some maintenance excess amount to be kept as collateral for borrowed securities which ranges from 30% to 40% of the total market value. The margin interest rates usually range from 5% to 10% but can differ. When the borrowed amount is used to invest, the interest amount is tax-deductible. If there is any market fall, margin account investors can have a margin call and reduce leverage by selling stocks or depositing more funds.
2. Investment and RRSP Loans
Another good option is investment and RRSP loans. RRSP loans are provided at competitive interest rates which are low whereas the interest rates of investment loans may be more. These interest rates are competitive as some of the financial institutions are paid twice and hence they earn interest on the loan and generate fees on the purchased investments. Investment loans may generate tax deductions for the interest amount and not the full principal and interest amount.
Refinancing your mortgage or to take out a new mortgage on real estate can be used to invest in shares. If you borrow money against a rental property it does not mean that interest will be tax-deductible if the amount is used for a personal reason. However if the money is borrowed to invest in bonds, stocks mutual funds etc, these are applicable for interest deductibility. The downside of mortgaging is that your equity could be at high risk if you experience losses in investment.
4. Short Sell Stock
When you short sell a stock, you tend to borrow shares from your investment company because you think that the price of the stock might fall. However, if the stock price rises,you end up losing more money that you actually invested.
Things to consider while Borrowing
- Interest rates – Interest rate is the most important factor that one should consider while borrowing as the higher the rate of the interest, the more it will cost.
- Capital Risk- The investment value can go down anytime and you might need to sell the investment quickly, this may not be able to cover the loan balance.
- More Losses- If your investment falls, you will lose the big amount borrowed to invest. Whatever may be the situation,you need to repay the loan and interest.
- Repayment of Loan- If you are not capable of repaying the loans within the time frame, you should not add more to your existing debt load.
How to Manage the Risk Involved
- Choose the Best investment loan option- If you have decided to borrow to invest in shares, don’t just accept the loan plan offered by different trading platforms. By performing a thorough research, you could save a lot of interest and get a better featured loan plan for your investment.
- Borrow Less Amount- Don’t borrow the maximum loan amount offered by the lender. The more the borrowed amount, the higher your chances of interest repayments and potential losses.
- Interest Payment- It is always better to repay the interest amount every month to prevent from the burden of repayment of a bigger amount later on.
- Keep an Emergency Fund- Having a particular amount kept aside that you can quickly access will prevent you from selling your investments, incase you need quick cash.
- Diversification- Investors should always go for diversification as it helps you in difficult times. If one investment falls in value, another can help you rise.
Borrowing money to invest is opted by many successful investors and they have reached their financial goals-whether it’s education fees, to start a new business or to buy a dream house. Borrowing money to secure investment may seem illogical for some but good returns may be profitable if done in a strategic way.
Borrowing of money to invest allows you to deploy a large amount of money at once or after some time. The interest may be tax deductible for those investing in publicly traded securities. One Of the biggest risks involved here is that the investment made with the borrowed amount may fall in value. However if it is a long term move, could be less of a concern. And,over time the loan amount may become bigger than the profit made. Borrowing can be an effective strategy for some if you time things properly but market fluctuations are not in your hand. Investment turns out to be best when it is done for a longer period of time as opposed to short term profits. Markets trends punishes the average short term investor but rewards a long-term investor.