Borrowing money to be used for paper investment is simply a gamble.
Investing in the stock market or mutual fund has risk associated to it – past performance does not and cannot be a guarantee of future returns. What more if you borrow and use it to invest/trade? What if you lose your job next month?
There are new investors who feel great these days because their portfolios are showing fantastic numbers in less than a year of investing. Ironically, some of these people have actually borrowed money to invest in stocks and mutual funds.
How did I know that they borrowed? Because they’re the ones who asked me that question.
Yes, It’s Okay To Borrow And Invest, But….
Borrowing money to invest in paper assets is called “gearing”. In the Philippines, it’s more popularly known by experienced investors as “leveraging”.
Leveraging is okay if an experienced investor or trader has multiple streams of income aside from a fixed salary/income. It is also okay if one has extra money to be used whenever the capital market drops.
Leveraging is also great if one has profound understanding about the risks of volatile and unpredictable investments.
Maybe for now our new investors are enjoying their profits and are able to leverage their loaned money. Happy to see green numbers.
They have not seen the worst. When the market crashes, tears will surely fall. Spouses will fight. Children will stop schooling.
Borrowing On Margin
For experienced and hard-headed investors/traders who want to borrow money to trade stocks, here are the basics on borrowing on margin from COL X2 FAQ’s.
Borrowing on margin has inherent risks. Funds obtained on margin are considered a loan secured by your portfolio, and the loan must be repaid along with the interest accrued. The amount of your loan is unaffected by fluctuations in the value of your portfolio; however, you may lose more than the collateral value of the stocks in your margin account.
Because of the risks involved, it is important that you fully understand the rules and requirements involved in trading stocks on margin.
1) Margin borrowing increases your level of market risk and is not for everybody.
2) All the marginable stocks and cash balance in your account are held as collateral for your margin loan.
3) You must repay COL the amount of money you borrowed on margin, regardless of the underlying value of the stocks you purchased.
4) Interest will be accrued on your margin loan depending on the daily amount borrowed and will be deducted from your account at the end of every month. Base rate is subject to change without notice.
5) You must maintain a minimum amount of equity in your account of at least Php200,000.
6) COL can change the margin requirements for any security without prior notice.
7) You should maintain a minimum equity percentage to fully utilize the margin facility.
As a new investor/budding trader, would you borrow money to invest in stocks or mutual funds? Share your thoughts in the comment section below.
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P.S. 1.The OFW UsapangPiso Forum in partnership with Colayco Foundation for Education will be conducting a webinar featuring Mr. Armand Bengco who will talk about proper money management – spending, saving, planning & investing entitled “Pisobilities: Wealth Within Your Reach” on April 19, 2013 at 6PM (Philippine time). Register here now! P.S. 2. For those who will not make it to the Money By The Book event of OFW UsapangPiso group, you may attend the Personal Finance for Every Juan seminar sponsored by The Global Filipino Investors Singapore. You may visit their Facebook event page for more details.
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Photo credit: Ken Teegardin, Number and Finances
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