Can i invest loan money

Buying stocks on credit is a bad idea

With a good mix, an equity investment brings at least 6% growth in value over the long term. And time and again, the stock exchanges offer opportunities that require immediate access, for example in the run-up to corporate takeovers.

Course jumps of 20% or more are hard to miss. Investment products with a leverage that multiply profits accordingly are even more exciting.

Take out a loan and buy stocks?

However, stocks cost money and leverage products require a margin to be paid to the provider. So what do you do if your own cash reserves are tight or otherwise firmly invested? Of course, you could take out a loan and buy stocks. After all, interest rates are so low that they pale completely before the development of some stock market hits.

For example, over five years, the price of Amazon shares rose 424%, and Facebook 500%. In Germany, the pharmaceutical supplier Sartorius even achieved a plus of 537%, and the electrical engineering company Aixtron achieved almost 360% in the last twelve months alone. This turned € 2,000 into € 9,200 - in just one year. Taking out a loan and buying shares from it seems only logical in view of these proportions.

But who can foresee the future when they get on board? It is then often too late for further top profits. In the examples mentioned: The Aixtron share, for example, now seems to have reached its limit. Neither can the trees at Amazon grow endlessly into the sky. And who knows what will happen to Facebook after the data scandal? Only Sartorius is currently still in the green.

High increase in value required

Stocks are always a risk. If their value drops unexpectedly, the full loan amount including interest must still be repaid. With leverage securities there is even a risk of total loss. Nevertheless, it is not unreasonable to speculate with borrowed capital. It all depends on the individual case. An installment loan where the house and yard are at stake is definitely not a solution.

At most, a securities loan would be an option for experienced investors with sufficient financial backing. Your own deposit serves as a security deposit, but with discounts. Even solid stocks of large corporations will be loaned between 50% and a maximum of 80%. However, the loan interest cannot be deducted for tax purposes. In addition, the taxes due on sale must be deducted from the increase in value of the shares.

Star investor Buffett also advises against this

Overall, the risk that a loan will lead into a downward spiral is very high. Especially when the loaned deposit loses value, more and more money is borrowed and the debts grow.

"With the pressure nobody makes the right decision anymore," says even star investor Warren Buffett. On the occasion of the increasing number of securities loans in the USA, he recalled earlier massive price drops in his otherwise successful investment firm Berkshire Hathaway in an annual letter to shareholders. The past can repeat itself at any time.

What many are not aware of: stock losses are not as easy to make up as it initially seems. After each setback, a stock has to work its way up from the lower level. If it falls by around 50%, it will of course be quoted at 50% of its previous value. If it increases again by 50% from there, it only compensates for 75%.

Because 50% of 50 is 25. For a complete compensation, the paper would have to catch up 100%. The lower the price falls, the more it has to grow disproportionately. Anyone who realizes this effect is unlikely to take out a loan to buy stocks.

Lombard loan - forms, application & example If you have too little money of your own to speculate on the stock exchange, you can take out a securities loan - a definition of Lombard loan. > read more


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