Borrowing to Invest

Submitted by Share Trading on 10 March, 2010 - 19:59

“Borrowing to invest” refers to borrowing money from a lender or financial institution to buy shares, bonds or managed funds. It is similar to taking out a mortgage to buy a house, land or any other property. This is a common practice among the investors and considered as an effective financial strategy as long as the entire procedure is managed properly. The whole idea of “borrowing to invest” is to invest more money in the market (stock market or managed funds) to increase profitability. In exchange of lending money, the lender receives a certain amount of lender interest from the borrower which is currently about 10%.

The Best Time to Increase your Investment by Borrowing Money

Usually the tendency of borrowing to invest increases when the market is bullish since this gives a better chance to the investors to make more money from their investments. For instance, if a trader is investing money in the Australian Stock Exchange (ASX) during a time when the market is bullish, he will be able to make $1,000 worth of profit with a portfolio of $10,000 (assuming that the return on investment is 10%). Now if he can boost his portfolio by $40,000 by borrowing money from a financial institution or lender, he will be able to make an additional $4,000 worth of profit.

Borrowing to Invest- Some Important Factors to Keep in Mind

However, when it comes to borrowing to invest, the investors need to make sure that the interest that they are paying for the borrowed money is not exceeding the amount that they are receiving from the additional investment (in average). In addition to this, an investor also needs to keep in mind that investing borrowed money will make his investment riskier as the market is volatile and things can go wrong time to time. Therefore, it is important to make sure that the investor has adequate fund in hand to clear out the interest payments during the times of crisis.

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