Borrowing to Buy Shares

I’m sure we all have that one friend that buys and sells shares. You might even know someone that trades in options and derivatives. The returns can be lucrative, however the general rule of finance still applies – it takes money to make money.

If you lack the funds to invest, or want to increase the proportion of your investment portfolio invested in the share market, then you are likely looking for a margin or investment loan.

Essentially these loans allow you to borrow money to invest in shares or managed funds. The restrictions vary amongst lenders, however the tier 1 lenders will generally have a list of approved shares or manages funds that the funds may be utilised for. These loans will require security, which may come in the form of property, shares, or other assets.

There are some benefits to margin lending, such as increasing returns from higher performing investments (compare ASX to real estate over the part 24 months). The interest paid on margin loans is usually also tax deductible. Finally, investing in the share market may allow you to defer paying tax on potential capital gains, and the investment is highly liquid (i.e. can be converted in to cash quickly).

It is also important to recognise the risks that come with this form of investing. The share market can be volatile, and options / derivatives even more so. If the value of your portfolio drops suddenly, the lender may exercise a margin call. This may occur when the value of the portfolio is lower than the value of the loan, and the borrower needs to supply additional capital to make up the shortfall.

If you are considering borrowing to invest in the share market, we recommend ensuring you have a robust knowledge of share trading (if you don’t know what a Bollinger band is, it may be too soon for you!). There are platforms available that allow you to create ‘mock’ share portfolios and trade them. Additionally, there are many experienced brokerage firms, wealth advisers and managed funds who may trade on your behalf.

If you want any more information on margin lending, please contact one of the team at Flexible Capital to learn more.

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