Your credit score is your currency that’ll help you make your dreams come true in the first-world. In simple terms, the higher your credit score the more likely you are to secure a good loan using leverage.
Leveraging refers to borrowing a loan to make further investments with the aim of wealth creation. It’s no secret that many businesses have been built on this foundation.
The stock market is quite popular with investors who are looking for avenues to invest borrowed money. Even though stock prices can rise or fall at their own will, it’s always better to select blue-chip companies for investment.
As long as investment returns are greater than the cost of borrowing—the interest rate—it’s smarter to invest and make money.
Is it a good idea to take out a loan to invest?
Your financial institution may not agree to extend a loan to be invested in shares. This is because you’re not likely to fulfill the 5-C criteria:
However, the stock brokerage industry lets investors take loans to invest in shares by keeping the stock as collateral.
Here’s how to borrow money to invest in shares.
Margin Brokerage Account
This is the type of loan a broker will give to an investor so they may invest in shares. In order to be eligible for such a loan you need to be an account holder in any stock brokerage firm. Once you open an account in your name and buy stocks in that margin account, the broker covers the cost that is over and above the amount in your account. This way, with margin loans, you can divide the cost of shares by only partially paying for it yourself and using the loan to pay the rest.
Borrowing Limits and Equity
The margin loan doesn’t pay for your investment shares unconditionally to any limit. It only loans out half the price of shares to you so in order to make a purchase you need to have at least 50% of the cost in your account. The portion of cost you cover yourself is known as your equity in the account. With a margin account, you’re required to meet the minimum requirement for investor equity if you have an outstanding loan. This means that with $2000 in your account, you’ll be able to purchase stocks worth $4000.
Returning Margin Loans
If your account equity falls below 25%, you’ll be required to pay off your margin loan. However if your stocks increase in value, you can use them to buy more stocks which will enable you to demand a bigger loan. It must be kept in mind that each loan is given on an interest rate which is determined by your credit score. This additional cost of borrowing is added to your outstanding amount which needs to be paid off. Investors can choose to pay off these loans based on the dividends they earn or by selling their shares.
Need to consult an expert about your credit balance or a better investment plan?
Masters Credit Consultants are experts in credit repair. We FREE consultation and help them devise viable investment plans. Your credit score is crucial for you to be able to invest in your long-term dreams. We’re here to help with just that!