Should one borrow money from banks to invest in shares /stocks IPO?
Ivey asks:
I wanted to invest in stock market and I dont have money, but my real problem is… should I borrow money from commercial banks to invest in the Initial Public Offer(IPO). Is it too risky. Everyone thinks it will go up. Some thinks it will depriciate and hence I may loose. Help
I wanted to invest in stock market and I dont have money, but my real problem is… should I borrow money from commercial banks to invest in the Initial Public Offer(IPO). Is it too risky. Everyone thinks it will go up. Some thinks it will depriciate and hence I may loose. Help
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No. It is too risky and to get ahead, you must be stable and borrowing is not stable…for the stock market.
Definitely not. While the interest you’ll have to pay is fixed, the gains from investing in stocks are not (especially IPOs which are extremely risky, usually individual investors stay away from those). If you’re going to invest in anything, buy a bond (assuming it’s coupon rate is a lot higher than the interest you’ll be paying on your loan, which is probably unlikely). As a rule of thumb, investing is for people who have extra money.
Stocks are going up and down, and alot (If not most) of the stocks are dropping. I don’t think you should do it.
You would only borrow to invest if you believe the return on investment is going to be higher than the interest rate of your loan. For example, if you borrow money at 5% interest rate you need this stock to go up AT LEAST 5% before you’re making any money - anything less would mean you’re LOSING money overall.
The fact that you are even asking this question indicates that you’re NOT confident that the ROI is going to exceed your borrowing costs, so you really shouldn’t borrow to invest.
Do consider that if the stock returns less than your interest rate you’ve not only lost capital, but you’ll also have to service the loan since even selling your stock doesn’t put you in the clear. Its all bad.
The marketing spiel financial companies typically pump out about magnifying your gains by borrowing to invest put too much emphasis on the positive side. Anything which potentially magnifies gains also magnifies losses - and whilst you might be ecstatic making more money, the other side of magnified losses is far harder to deal with.