Investments in the stock market can be a quite capital-intensive affair. This is particularly true in case an investor is investing in large-cap companies, whose share prices tend to be significantly on the higher side.
Most investors tend to utilise capital generated through savings or business to invest in the stock market. However, in a scenario where the capital that an investor requires to invest in good stocks is out of their reach, they might look at the option of borrowing money to invest in shares.
While it is left at the discretion of an individual to finally take a call to consider opting for a loan for investing in the share market, experts suggest to refrain from going ahead with it.
In a scenario where an individual borrows money to invest in shares, what essentially happens is that they would have to service the loan on a regular basis via the payment of equated monthly instalments (EMIs). This could lead to a significant spike in financial burden. Another factor is the likelihood of underperformance of shares that an investor may have bought. This would only add to the financial burden in the long run.
On the other hand, if the shares perform exactly as per the expectations, it still has to at a level to generate sufficient profit to cover the interest part of the principal loan amount. If the profits aren’t significant to cover the interest part of the loan, an investor may either end up with a loss or have a no-profit, no-loss situation, which will negate the purpose of taking out a loan to invest in the first place.
In case an investor still decides to go ahead with taking out a loan for investing in the stock market, then they must consider the following factors. If an investor has shares or other securities in their demat (dematerialised) account, they can look forward to speaking with their stock broker or investment advisor to look at options of any loan against securities.
If there are any such options, an investor can consider pledging these stocks or securities with the stock broker to borrow money, which can be utilised to invest in more shares. Moreover, the loan is secured against the holdings, the interest rates also tend to be comparatively low.
It would be a prudent move to avoid taking out unsecured loans such as personal loans or credit card loans. The interest rates on such loans tend to be exorbitant and may further aggravate the financial issues.
So, always consider the decision to take out a loan to invest in the stock market with due diligence and through understanding of the consequences.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.