Investing in stocks makes it easy to earn money through a good return. If you lack the necessary capital for such an investment, a loan offers itself. Loans are currently very cheap. Nevertheless, equity securities always mean speculation and risk. Although there are arguments in favor, there are many arguments against investing borrowed money in securities. If you do not want to end up with empty hands, you should not buy stocks on credit. We explain the reasons in this article.
What a stock purchase on credit speaks
The share purchase on credit has increased sharply in recent years. First, let’s look at the arguments that can be used to buy securities with borrowed money. The start-up capital for entering into stock trading is relatively easy to realize, especially due to a low-cost loan. Currently, lending rates are at a historically low level and loans are already available for a very low repayment rate. So why not invest in blocks of shares or individual securities that pay off the loan through the return and, moreover, promise profits?
Two models for a share loan
This idea sounds reasonable and advantageous at first. With the money of a loan, you can eventually expand your existing stock portfolio or even get one. Provided you bring along the necessary creditworthiness, you will receive quick and uncomplicated money from your bank, for example through an installment loan without earmarking. This saves you, for example, the waiting time that you incur when you want to get fixed money. With a borrowed amount, you can quickly cash in order to acquire promising shares. With a installment loan, you can then also plan firmly what amounts you expect monthly as additional financial burden. In the best case, this pays off for you via price jumps and increases in the value of your securities.
In addition to the classic installment loan model, you can consider a second option if you already own a depot. As an investor, you lend money to your existing stock portfolio, which also serves as collateral. Then there are no installments to pay but only interest, which usually falls due every 3 months. Such a securities loan is also called Monarcredit. The repayment of your borrowed amount is flexible. You can guarantee the borrowed amount in installments, in full or on the sale of your securities. Credit lines as well as the modalities of the repayment are to be clarified with your depot provider. It should be noted in the securities loan that even solid shares from your existing portfolio are discounted. Their mortgage lending value is usually no more than 50 to 80% even for securities of major corporations. In the negative, you risk not only a lossy speculative business on your newly acquired shares, but also the existence of relatively secure investments.
Bottom Fishing If you are looking for a promising or cheap equity investment, you may encounter the term “bottom fishing”. Newcomers to the equities business in particular are encouraged to take such options, as these are stocks at a low point. These have fallen in value in the past and therefore relatively cheap to acquire. By fishing these “from the ground up”, you can benefit in rebuilding the value. As far as the assumption. Of course, this is speculation, because such securities can continue to lose after their purchase or remain at a low level for a long time.
What arguments against loans for shares speak
In recent years, several stocks have risen in value to many times their original value. Facebook, Amazon or the pharmaceutical supplier “Sartorius” are examples of such high-altitude flights. Investors who invested in the securities of such companies at the right time could make huge profits. Where the money for these financial products came from plays no role anymore. If a loan was necessary for the equity investment, it could theoretically be repaid by the yield in one go.
Stock trading is pure speculation
The stock market is the place where shares are traded. There, demand and supply as well as numerous external factors lead to fluctuations that are unpredictable. Unpredictable developments can lower the equity value of a company. The latest examples are the exhaust gas scandal of the Volkswagen Group or the debate about data misuse on Facebook. Such scandals adversely affect the share price of companies over the long term, which has a negative impact on you, especially as a retail investor.
It is not only in the days of Donald Trump, Brexit or globalization that events can occur quite unexpectedly, which can distress the entire stock market world or the economy of a nation. Difficulties on the American or Chinese stock exchanges, for example, can trigger a worldwide domino effect, leading to unprecedented price falls. Experience shows that such developments do not announce themselves in the long term and cause far-reaching losses. Given the immense amounts currently flowing through personal loans into share purchases, stock market experts are skeptical about developments. The scale of such investments has long since exceeded the sums involved in the 2007 global stock market crash or the bursting of the dot-com bubble in 2000.
Leave equity loans to the professionals
If you are not familiar with the mechanisms of the stock market in a sound and sustainable way, you should not finance shares rightly with a loan. Beginners, who scoff at cheaply offered loans a chance for quick profits on the stock market, risk rather a debt. Even experienced stock traders are not prejudiced against the total loss of their investment, even though they have expertise in the events and effects of the stock market. However, professional investors generally have a variety of packages that can compensate for any loss, thereby minimizing the damage. In addition, such investors have funds that significantly exceed the finances of a retail investor. Based on their knowledge, stock market experts will be able to identify and interpret trends more quickly than outsiders. Even if you are a small investor and have basic knowledge, you will not have much time to analyze all the events in the stock market.
Consider the consequences of a loan
Of course, if you are able to safely pay off a loan, use is up to you. However, you must also consider personal risk factors over the term. These arise from individual circumstances such as the potential loss of your job or your sudden disability. If, for one reason or another, you are no longer able to service your loan, you are threatened with debts that in extreme cases threaten your existence. Banks or other lenders generally hedge against possible losses by providing security. These securities are used in an emergency by selling them. Other unpleasant consequences may be a garnishment or the use of your guarantor.
Credit and credit bureau In any case, your credit bureau score deteriorates when you take out a loan (even with a loan without credit bureau). This can be an obstacle if you are dependent on a loan that you need more urgently to buy a new car or property. Even if you pay off a current loan on time and reliably, your credit rating suffers.
Invest in shares only free money
There are rules on the trading floor which can not be influenced by you and are difficult to predict. If you want to gain your first experience as a beginner, you should first proceed with a manageable commitment. Use only a certain amount, which you can safely do without for such investments. Do not consider investing in the stock market as profitable, but consider it better than a risk business. This can be worthwhile due to high returns, but the opposite scenario can also occur. Then you not only make a loss on the stock market with worthless papers, but also have to bear the financial burden of a loan.
Avoid typical rookie mistakes by not being unnecessarily pressured by exaggerated expectations, be patient and give yourself a realistic look. Comprehensive advice before investing in equities is just as recommendable as the assessment of your own willingness to take risks. In principle, financial products with a high yield perspective always also have a greater risk of losing money. Nevertheless, if you are considering applying for a share purchase loan, at least make sure that the repayment and repayment installments are collateralised under all circumstances.
Low-Price Stocks When buying a “stock down”, keep in mind that this is not necessarily a bargain. For example, if a stock lost 50% of its value in the last year, it can be offered cheaply at the moment. In order to finally return to its original value, an increase of 100% is now necessary.
Stock trading brings with it a number of unmanageable risks. Possible price losses can usually be predicted to be difficult or even impossible. Investing in this market can be a loss-making business, but it can also bring in hefty returns. If you want to gain a little bit of basic knowledge as a beginner, you should do this first with an effort that can be taken in case of loss. There are safer alternatives to investing your money than stock speculation, even though the prospects for returns may be lower. In the end it depends on your willingness to take risks, how much money you put in which shares (packages).
You can exclude unnecessary risk in advance by not taking additional debt as a result of a share purchase by taking out a loan. A reputable banker will probably advise you not to use a loan for such purposes. The risk that your stock will go down in the cellar or the market overheats and collapses is, at least theoretically, always the case. This can be caused by worldwide crises that are beyond your control. Face this risk and generally consider buying stocks as what they are: risky, speculative-based businesses.