Share market investments can be quite capital intensive. Especially when you’re investing in large cap companies, whose share prices tend to be much higher, requiring you to pump in more money to purchase their shares.
Now, if you already have adequate capital lying around to invest in the stock market, then you have no problem. But what if you don’t? What if the capital that you require to invest in good stocks is out of your reach? What do you do then? Well, the answer is simple. You can simply borrow money to invest in shares.
Though you can take out a loan to invest in shares, should you? That’s what we’re going to be taking a look at in this article. Continue reading to find out.
To put it simply, the answer to this question ultimately rests on you. While some people have no qualms about it, others tend to be vehemently against it. And so, it is completely up to you. That said, here’s something that can help you make this decision in a much better and more thoughtful manner.
When it comes to share market investments, money management is an equally crucial skill that you should pick up. We’ll see why in a short while.
Now, when you borrow money to invest in shares, what essentially happens is that you would have to service the loan regularly through the payment of monthly EMIs. This can increase your financial burden considerably. And if the shares that you bought turn out to be underperforming, the burden will only intensify.
On the contrary, if the shares perform exactly as per your expectations, it still has to generate enough profit to cover the interest portion of the loan. If the profits aren’t enough to cover the interest portion of the loan, you can either end up with a loss or at the very least a no profit no loss situation, which will negate the purpose of taking out a loan to invest.
Okay so, if you’ve decided to borrow to invest in the stock market, here are a few things that you should keep in mind.
1. Use your holdings to borrow money
If you already have shares or other securities in your demat account, get in touch with your stock broker to see if they offer any loan against securities. If they do, you can pledge them with your stock broker to borrow money, which you can then use to buy more shares. And since the loan is secured against your holdings, the interest rates also tend to be quite low.
2. Refrain from taking out unsecured or high interest loans
When borrowing to invest in the stock market, make it a point to never take out unsecured loans like personal loans or any other high interest loans like credit card loans. The interest rates on such loans tend to be exorbitant, leaving you in a very precarious financial situation.
Now that you know what borrowing to make share market investments entails, the final decision is up to you. Whatever your decision may be, make sure to think it over thoroughly and consider all possibilities before committing to it. And if you’re just starting out with investing and you don’t have an online trading and demat account, contact Motilal Oswal right now to open one for free.
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