If you want to grow your wealth by investing in the stock exchange market in hopes of making the value of said stocks go high in the future, it can be risky but very rewarding.
However, these risks will only skyrocket if you borrowed the money you used for investing. Take note that the only reasonable time to borrow to invest is when the risk of the loan and stock is low but has a high return.
Risks
Let us start with the risks. With a loan, you can access a big pool of money to invest in, prompting you to buy more significant stocks with bigger value. Also, if you are on a high marginal tax rate, you can benefit from a slew of benefits such as tax deductions on your interests.
Take note, however, that the more money you invest, the more money you will potentially lose. Here are the risks attributed to taking out a loan to invest.
Significant loss. If there comes a time when your stock value plummets, you will lose a substantial amount of money since you still have to pay back the lenders. This is especially true if you have a high-interest rate on your loan.
Capital Risk. Also, if the stock value of your shares goes down, you might have to sell them to acquire other stocks that have more significant profits. However, before you can do this, the money you got from selling those stocks must go back to the loan. This makes it harder to pay the loan if your stocks’ value goes down.
Interest Rate Risk. If you got a loan with a variable interest rate, the interest rate might increase, making your monthly payments bigger while having a low profit in your stocks.
Investment Income Risk. The investment income risk goes hand in hand with the interest rate risk. You will find it harder to repay a variable rate loan with your investment returns if the return themselves doesn’t have enough profit in them.
However, if you are adamant about investing in the stock exchange with a loan, you might want to consider these types of loans.
Margin Loans
With a margin loan, you can use the money you borrowed to invest in shares, managed funds, and ETFs. Margin loan lenders will always remind you to keep your loan to value ratio below at least 70%.
If your LVR goes up above 70%, the lender will call you to keep it down in the next 24 hours.
Investment property loans
If you are interested in investing in real estate and other types of properties, then investment property loans are for you. Commercial buildings, land, apartments, houses, are some of the properties you can invest in with this loan.
If you are comfortable with the risks of borrowing to invest, there are things you should consider before you take out a loan for investing purposes.
Check the Rate of the Loan
Before choosing the stock in which you want to invest in, you must first find out the interest rate of the loan you are going to apply for.
Even with a significant return of investment, giving a big percentage of it back to the lender can be considered a loss. Check out and visit www.creditninja.com/quick-cash-loans for more info on their interest rates.
Check Your Level of Debt
If you have a high-interest debt on your accounts, then it is not wise to take on more debt to invest in stocks.
Your priority should be in paying back all debt that you have before venturing on the stock exchange. Even then, there is a high chance of you not being approved of that loan, anyway, since you have significant debt in your hands.
Weigh the Payments
Big companies like Netflix, Microsoft, and Home Depot all started small. Most stocks are like this, starting small and just gaining traction over time. This means that potential profit might take a long time for you to enjoy.
If you’re taking out a loan to invest in stocks, make sure that in the meantime, you can tank the repayment terms yourself. Nobody can become a millionaire in the stock exchange overnight.
Do Your Research
If you are continually looking in the stock exchange, you may have already realized that the market can change in the blink of an eye. Before venturing into the stock exchange, always be prepared for the ups and downs of the industry.
The responsibility is big, and the potential for drawbacks are just as unsure as to your returns. If you can’t handle it, then investing is not for you.
Takeaway
Taking out a loan to invest is a huge gamble. It goes with its risks and rewards, and most of the time, the chances of you making big is just as big as the chances of you losing significantly. Always do your research and, most importantly, repay all the loans you have taken for that investment opportunity.
