This is one of the most important questions for those who wish to borrow money to invest and make money in short period of time. General rule applicable for such investors is that, ‘In long term, you can only make money by staying in the game’.
Let us understand this in detail, suppose you have drafted your plan where you are expecting aggregate 15-20% returns per annum. So if you are planning to borrow the cash at interest rate around 10-11% per annum to invest in stocks then let me tell you, you are reading this article at right time. When you calculate on paper you may feel practically it is possible but in real time such strategies are extremely risky when expected rate of returns are not guaranteed. With thought like this, there are addition four risks waiting for you with leverage and they are:
- It multiples your risk level.
- If country is facing financial crisis for short term, In that case your investment valuation will drill down and your interest payments for borrowed loan may hamper your other plans.
- It is observed that even though you hold proper road map for investment with correct plans but during panic situation plans get diverted when you are investing with borrowed money.
- There is a guaranteed loss of peace of mind and peaceful sleep with borrowed capital.
Different ways to Borrow Money to Invest in Stocks or Funds:
- Taking advances from mortgaging house or gold.
- Borrowing funds from relatives, friends, neighbours, etc.
- Obtain leverage thru trading in derivative segments (Futures or Options)
- Short selling stocks. In simple words, selling stocks what you don’t hold which means you are borrowing stocks from somebody temporarily.
Who should Borrow Money to Invest?
Borrowing money for investment in financial market are very risky. Here I will tell you who should borrow money. Our suggestion on this is:
- No, In case you are a beginner or amateur investor.
- No, If you do not hold any other source of income (Generally to raise fund in bad times.)
- No, In case you have outstanding debts.
- Yes, If you are psychologically strong person and well verse with market, strategies and fundamentals.
- Yes, only in case when you opt to raise fund for golden opportunities.
- Yes, only when you have practically traded for some years and have strong understanding on risk, strategies and market trends.
It is highly recommended that not the borrow money if you are a fresher or beginner in this field. An investment guide suggest that, If you wish to borrow money after some experience then you should prefer to invest into low risk assets and then gradually move ahead to medium or high risk assets. General thumb rule says that you can borrow money when you are sure above expected returns (Like Bonds, Fixed Income Deposits) you should avoid borrowing cash when returns are not fixed (Like Stocks, Mutual Funds). We suggest investing with borrowing cash is very risky and lot of cautions should be taken else you may ruin your finance either partly or completely.
- Tutorial Course - Basics of Investing for Beginners -
» e-Learning Chapter 1: What is Investment and its objectives.
» e-Learning Chapter 2: Why is Investment important for Economic growth.
» e-Learning Chapter 3: Ways to Invest your money and make profit.
» e-Learning Chapter 4: What are the Best Investment Opportunities for your Retirement Income.
» e-Learning Chapter 5: What are the Legal Matters you should know before Investing.
» e-Learning Chapter 6: Different Types of Investment Risks Involved in Investing.
» e-Learning Chapter 7: When and How to Invest in Stocks.
» e-Learning Chapter 8: How Positive Attitude can improve your Investing mindset.
» Currently Reading: Should you Borrow Money to Invest in Stock Markets or Funds.
» e-Learning Chapter 10: 5 Rules of Thumb: Key points to be consider before making Investments.
» e-Learning Chapter 11: How to Calculate Stock Market Returns, Break Even Point and Basis Point.
» e-Learning Chapter 12: How to Calculate Compound Interest and Simple Interest.
» e-Learning Chapter 13: Rule of 72, 114 and 144 of Compounding Interest formula.
» e-Learning Chapter 14: What is the Difference between Trading, Investment and Speculation?
» e-Learning Chapter 15: How to become a Smart Investor or a Successful Investor.
» e-Learning Chapter 16: Tutorial Quiz – Basics of Investing for Beginners Module.