3 reasons why your approved loan is good to invest in stocks

Borrowing money from lenders like CreditNinja to invest can be a bit daunting for most since you don’t own the money you are borrowing, and losing it will give you more debt, which can potentially turn into bankruptcy.

Experts say that one should only invest a loan when the return on investment is high while the risks of your investments are low.

One thing to also keep note is that when you are investing your loan to stock, make sure that the return on investment will happen before the loan is due or you will have to pay the money back by other means. Of course, you should also make sure that the investment is bigger than the loan itself or else; it doesn’t make any sense at all.

All of these things seem to be quite risky, but it is only so if you don’t play your cards right or you don’t know what you are doing at all. Investing a loan is a decision that needs time and adequate research to pull off as it is highly risky. But, if you manage to make it, you will be raking in money in your pockets as well as having your loans get paid.

You can deduct interests

Most of the stock dividend income in the market usually receives QDI  treatment or Qualified Dividend Income treatment. This means that the federal government is allowed to put the tax in them for up to 20%.

Even if stock dividends are usually taxed lower than the regular income of most employees, they are still categorized as a type of taxable portfolio income. Because of this, the interest of the debt that you used to invest in stocks is an allowable deduction for the income you’ll get from your net investments.

It increases your portfolio size

As you take out a loan to invest in stocks, the size of your portfolio increases, and because of this, you are able to borrow more money from a lender as your borrowing limit increases. It will also increase your investing capacity significantly, and if you are lucky enough, you can get a more significant return on your investment.

You can diversify your investments

With a larger funding pool for your investments, you will be able to spread your funds to different stocks and shares. This way, if you have a loss in one investment, it won’t affect you that much since you still have other investments to expect. Diversifying your portfolio could also mean that you can reduce its risk and have your return income less frustrating.

Margin loans

Margin loans are the go-to loans that investors get when they want to borrow money to invest. This is especially true for investors who are just feeling out of the stock market. If you don’t know what a margin loan is, it is a kind of loan that lets you borrow money so you could invest in managed funds, shares, and exchange-traded funds.

Lenders that offer margin loans usually have a required level of LVR or loan to value ratio. The most common percentage that is required is 70%.

Whenever your investment lowers down in value, or your loan gets bigger, the LVR goes up. When that happens, you will get a margin call to notify you, and the lender will give you at least 24 hours to lower down your LVR.

There are three things you can do to lower down your LVR once it goes beyond the agreed level. One of these solutions is adding more managed funds or shares for you to have an increase in your portfolio value.

Another thing you can do is to sell a part of your portfolio to pay off a part of the loan’s balance. One last thing you can also do is to deposit funds to pay off a part of your balance from your margin loan.

If you can’t do any of these things within the allotted time, however, your lender will be forced to sell off some of your investments to lower down your LVR to an agreeable level.

Margin loans are a lifesaver for a lot of investors out there, but it can go quickly south, especially if you don’t know what you are doing or you don’t know anything about margin loans at all. If you are either of these things, don’t take one at all.

Takeaway

While most of the more experienced investors out there usually think that borrowing to invest is generally a bad move, it is actually not. Borrowing gives investors with a low resource fund a fighting chance to get into the stock market and make it big. With the right knowledge about your investments and excellent management skills to your finances, you can fare well with other competitors who have funds of their own.