How To Borrow Money For Stock Investing

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Should You Borrow Money To Invest | Leverage Stocks

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Why Would You Short A Stock

Typically, you might decide to short a stock because you feel it is overvalued or will decline for some reason. Since shorting involves borrowing shares of stock you don’t own and selling them, a decline in the share price will let you buy back the shares with less money than you originally received when you sold them.

However, there are some other situations in which shorting a stock can be useful. If you own a stock in a particular industry but want to hedge against an industrywide risk, then shorting a competing stock in the same industry could help protect against losses. Shorting a stock can also be better from a tax perspective than selling your own holdings, especially if you anticipate a short-term downward move for the share price that will likely reverse itself.

Scenario #3 37% Annual Return 69% Interest Rate

This is pretty much your nightmare scenario, interest rates double and S& P 500 matches its worst 15-year performance at 3.7% annualized return.

As you can see, in this scenario youd lose $31k. However, your stock asset value is still enough to cover your outstanding loan.

Even though this scenario is highly unlikely to happen, there are things you can do to mitigate this.

You could pay down the principal as the interest rate rises. Interest rates dont shoot up overnight, they gradually increase, giving you plenty of time to start paying down the principal.

You could also hold on longer than 15 years. Returns could improve and your stocks would continue to compound. The worst 20-year annualized return for the S& P 500 was 6.4%.

Feel free to play around with the .

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Example Of A Margin Loan

Investors with a margin account can borrow up to 50% of the purchase price of marginable investments. Let’s take a look at how that would work: Let’s say you want to purchase $6,000 worth of shares in company X and have $3,000 in your brokerage account. You’d pay for 50% and your broker can lend you the other 50% for company X’s shares. Your total purchasing power would then be $6,000, meaning you can spend up to $6,000 worth of marginable investments.

A margin account can also allow you to borrow against your marginable securities you already own. For example, if you have $3,000 in marginable stocks and haven’t borrowed against them yet, you can buy other investments worth $3,000 without having to add any cash into your account. The marginable securities you already own act as collateral for the first 50% , while the newly purchased marginable investments provide collateral for the other 50% . So you’d now have $6,000 worth of stock in your account with a 50% loan value.

Quick tip: Buying on a margin is a highly risky venture, especially for new, inexperienced investors. It’s therefore advisable to start with a cash account before using margin.

Access Liquidity Without Disrupting Your Investments

Should I Borrow Money To Buy Shares

Borrowing against your portfolio, rather than from it, helps avoid the risk of incurring capital gains tax, disturbing your strategic asset allocation or selling out of the market at the wrong time.

If you need to make a college tuition payment, pay a big tax bill, or jump on a time sensitive business opportunity, your first impulse might be to write a check or to sell investments to raise cash.

The former could put your short-term liquidity flexibility at risk and the latter may throw your long-term investment strategy off course. A way to avoid either situation is to borrow the money you need against the value of your portfolio. Thats the idea behind securities-based lending, whereby investors take out a line of credit using their investments as collateral. This type of borrowing is often faster and more cost-effective than other alternatives.

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What Can You Use A Moneylion Investor Loan For

The MoneyLion Investor Loan lets members use the money on almost anything they choose. Some of the more common uses of MoneyLion Investor Loans are:

  • Life events such as a vacation or a wedding
  • Elective medical

Remember, MoneyLion Investor Loans are non-purpose loans, so they may not be used to purchase securities or use for investing.

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.
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    How To Borrow Against Your Stock Portfolio

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    When you have amassed a certain level of wealth, different strategies start to make sense.

    One of those strategies is to rely on loans.

    But debt is supposed be bad right? Not always.

    This is the key concept behind the Buy, Borrow, Die Strategy you borrow against your appreciated assets to get access to cash. If you read the post and understand the concept, you might be wondering if you could take advantage of this.

    You most certainly can.

    In this post, Ill show you how you can use the same strategy as the wealthy to get liquidity without selling appreciated assets and triggering capital gains.

  • What To Watch Out For
  • To recap, the basic strategy of Buy Borrow Die is that rather than selling an appreciated asset, like shares of stock, you simply take out a loan using the asset as collateral. You get cash right now, as you would in a sale, but its a loan so you pay interest rather than capital gains.

    You could sell the appreciated asset but then youd pay capital gains tax on the gains. Why pay a 10%-15% or more cut in taxes when there is a better option?

    So, how do you do this?

    You Have To Make Monthly Payments On Your Loan

    ð BORROW to invest in the stock market? YES and hereâs the BEST way

    Personal loans require you to make equal monthly payments. When youre invested, you dont want to have to sell portions of your investment to make payments.

    Doing so would lower your return. It could also cause you to sell when your investment is performing poorly, resulting in locking in a loss.

    Other types of investments that have greater returns may not be as liquid. This means you can only sell them at certain times. If you cant get your money out to make your monthly payment, you could default on your loan.

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    Choosing Your Broker Wisely

    Choose the right broker or dealer to work with is essential. Brokers help you to search for the best stocks in the market for short selling.

    They also help you to look for sellers who are ready for short-trading. It would require a lot of time and resources to search for such owners and still make a profit.

    Always remember that you have a tiny window open for buying, selling and making some money. There are many brokers in the market, but you have to choose the best.

    Your experience when borrowing stocks will depend on the skills of the dealer you have identified. Choose an experienced dealer who understands how the market works and is proactive to guide you through the processes.

    Brokers charge for their work on commission. You need to choose a dealer who will give you the best rates.

    Short selling is a matter of timing, and you must, therefore, make a substantial amount that gives you returns and helps you pay the broker.

    You might also want to consider a dealer who allows you to pay once you have made a profitable sale. Such a broker or dealer is confident that his insight was helpful.

    Approach a dealer who asks for upfront payment with caution. This form of trading is a bit risky and may even lead to a loss.

    While the dealer is offering professional services, there should be an assurance that the advice given will make your borrowing profitable.

    Borrowing To Invest Can Be Hugely Profitable If You Manage Your Risks

    Borrowing to invest is a great way to earn higher returns, so long as you mitigate the risks and understand the costs. Leveraged investing is a favorite strategy of seasoned traders because of the potential for high returns. If youve already been investing for a few years and are looking for new avenues to increase profits in your portfolio, this might be it!

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    What Is An Investment Loan

    If you own stocks, bonds, and ETFs, some brokers or investment platforms will allow you to borrow against those investments. Brokers may call this a non-purpose loan, a portfolio line of credit, or an investment loan, and it is similar to how you can borrow against your investments to receive a margin loan.

    For example, lets imagine you have a $10,000 investment portfolio, some brokers might allow you to borrow $2,000 on margin to fund a small project or an emergency bill or a vacation! Its important to know that an investment loan or non-purpose loan cannot be used to purchase additional securities or investments, while margin loans can be.

    Unfortunately, many brokers and investment platforms have high minimums before theyll offer you a line of credit and a lengthy application process. You might need at least $25,000 in your investment account to even be offered an investor loan. And you may only be able to borrow a small amount or a small percentage of your investment value. However, MoneyLion members can unlock investor loans at low rates with only $500 in their investment account and borrow up to three times the balance.

    No Borrowing In A Market Crash

    Find out how to borrow to invest and earn higher returns while avoiding ...

    Even with low rates or zero interest, its advisable not to borrow and leverage money to invest at this time. My best suggestion is to stay put and return to the market when the fog clears.

    This article represents the opinion of the writer, who may disagree with the official recommendation position of a Motley Fool premium service or advisor. Were Motley! Questioning an investing thesis even one of our own helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

    Fool contributor Christopher Liew has no position in any of the stocks mentioned.

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    Use A Personal Line Of Credit

    If you dont have a margin account with a self-directed brokerage, like one of our favorites, Questrade, or youre not sure you want to open one, a personal line of credit is another way to borrow money to invest at a comparably low interest rate.

    If you are using money from a line of credit to invest, you will need to withdraw the amount you need from the line of credit and transfer it to your brokerage account to invest in the stock market. Like the interest charged in a margin account, the interest on a personal line of credit is at a fixed rate plus prime. Unlike a margin account, your line of credit will be at a fixed interest rate regardless of how much money youre borrowing or what currency youre trading.

    However, they will also likely require a minimum monthly payment. If you do not expect to pay back the amount you borrow in full before the bills due date, make sure to factor in the monthly payment as a regular expense until your trades are complete and you can repay the line of credit.

    Diversify And Reduce Risks

    Diversification is considered to be the only free lunch in investing. In a nutshell, by investing in a range of assets, you reduce the risk of one investmentâs performance severely hurting the return of your overall investment. You could think of it as financial jargon for âdonât put all of your eggs in one basket.â

    In terms of diversification, the greatest amount of difficulty in doing this will come from investments in stocks. As mentioned earlier, the costs of investing in a large number of stocks could be detrimental to the portfolio. With a $1,000 deposit, it is nearly impossible to have a well-diversified portfolio, so be aware that you may need to invest in one or two companies in the first place. This will increase your risk.

    This is where the major benefit of mutual funds or ETFs comes into focus. Both types of securities tend to have a large number of stocks and other investments within their funds, which makes them more diversified than a single stock.

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    What Are The Risks Of Borrowing From Your Portfolio

    It’s important to realize that there are risks involved in a margin loan – just like any other type of debt.

    There are three main risks when it comes to a margin loan or portfolio line of credit.

    First, if you use the money to invest, you could lose the money .

    Second, interest rates on the loan could change. Right now, we’re at historical lows for interest, but rates could rise in the future. Theoretically, they could also go down as well – which would be a small win.

    Finally, you could be subject to a maintenance call. If your portfolio value declines, your account can trigger a maintenance call and you either have to deposit new cash or sell a portion of your portfolio to cover the loan. While you’ll usually be notified of the need to deposit extra money, if your portfolio experiences significant losses, the brokerage may sell your stocks automatically to cover the loan .

    You Want Prices To Fall

    How to borrow from stocks ( what are margins )

    People invest in stocks with the hope of making money. Their goal is to ride the profit train on the tails of a companys positive news and soaring profits.

    But, did you know theres a whole other class of traders out there, called short sellers, who do just the opposite. The complete opposite.

    Short sellers are on the lookout for companies that are tanking due to negative news think news stories about people dying due to using the companies product.

    I know, I know, that may be an extreme example, but you get my point. Their end goal is to cash in on the falling stock prices that are surely about to happen.

    Stock trading is great when you have strategies to make money in any market. However, you need to make sure youre safe with it.

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    Understand How Margin Works

    Let’s say you buy a stock for $50 and the price of the stock rises to $75. If you bought the stock in a cash account and paid for it in full, you’ll earn a 50 percent return on your investment. But if you bought the stock on margin paying $25 in cash and borrowing $25 from your broker you’ll earn a 100 percent return on the money you invested. Of course, you’ll still owe your firm $25 plus interest.

    The downside to using margin is that if the stock price decreases, substantial losses can mount quickly. For example, let’s say the stock you bought for $50 falls to $25. If you fully paid for the stock, you’ll lose 50 percent of your money. But if you bought on margin, you’ll lose 100 percent, and you still must come up with the interest you owe on the loan.

    In volatile markets, investors who put up an initial margin payment for a stock may, from time to time, be required to provide additional cash if the price of the stock falls. Some investors have been shocked to find out that the brokerage firm has the right to sell their securities that were bought on margin without any notification and potentially at a substantial loss to the investor. If your broker sells your stock after the price has plummeted, then you’ve lost out on the chance to recoup your losses if the market bounces back.

    Looking At Your Entire Financial Picture

    Since debt is an important part of your financial picture, managing it requires a strategic approach. For more ideas on how to do so, Morgan Stanley clients should contact their Financial Advisor.

    Disclosures:

    Loan applications are typically subject to underwriting standards and independent approval. Rates and terms are subject to change without notice.

    Educational materials are not considered a commitment to lend.

    Educational materials should not be construed as tax or legal advice. Individuals should consult their personal tax advisor or attorney for matters involving taxation and tax planning and their attorney for matters involving personal trusts and estate planning.

    The proceeds from a mortgage/home equity line of credit or non-purpose securities based loan may not be used to purchase, trade or carry margin stock or securities or repay margin debt, and cannot be deposited into a Morgan Stanley Smith Barney LLC or other brokerage account.

    Morgan Stanley Smith Barney LLC and its affiliates and their employees are not in the business of providing tax or legal advice. These materials and any statements contained herein should not be construed as tax or legal advice. Individuals should consult their personal tax advisor or attorney for matters involving taxation and tax planning and their attorney for matters involving personal trusts and estate planning.

    Private Bankers are employees of Morgan Stanley Private Bank, National Association.

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