Gearing or borrowing helps in boosting your wealth accumulation. This is why there are some investors who have opted to borrow from https://www.frontline-collections.com/premier-debt-collection/private-debt-collection/ to get started in investing. Of course, this is after performing thorough consideration on all possible aspects of the investment.
Once you have the fund needed, you’d be able to purchase assets like shares or investment properties that you might not be able to get outright. On the other hand, borrowing to invest is sometimes deemed to be a risky strategy. If done hastily, it could lead to losing more money than what is initially invested.
Therefore, before you take out a share investment loan, it is imperative to ensure that you could service the associated cost of the loan which includes the repayment of principal amount of the loan. It is highly recommended to seek professional advice from a financial and tax expert. This way, you can discuss with them the potential benefits and risks of geared investing and enlighten you prior to coming up with a decision.
Borrowing to Invest in Shares
You may take out margin loan as a way to invest in shares. With margin loan, it lets you buy shares by paying just the fraction of cost of shares upfront. The lender on the other hand will be using your shares as a security for borrowed amount.
The cost of shares are moving often and you are risking loss if ever they fall in value. Normally, lenders are expressing the level of gearing by using LVR or Loan to Value Ratio, otherwise referred to as gearing ratio.
LVR is basically the value of the loan that is divided by total value of the shares. In the event that the value of shares have fallen to where the LVR exceeded the approved maximum amount, you might be required to repay parts of the loan or top-up on your loan collateral.
This is called as margin call and if it isn’t met within the given timeframe that is scheduled by the lender, then your shares might be sold by the lender in order to meet the margin obligations. If this happens, it means an automatic loss.
Managing the Associated Risks with Margin Loan
As a matter of fact, there are several strategies that can be used for risk management of margin loan like:
- Setting borrowing limit that you’re comfortable repaying with
- Making regular interest repayments to the loan to maintain the loan balance
- Regularly check the LVR