Låne Penger til Aksjer – Using Loans to Purchase Shares
Investments can be capital-intensive. The capital-intensive nature of many investments is what deters some people from making the most of them. It even hurts that a lot can happen while people are still saving up.
As a result, people who do not have the money can resort to certain things. This is where leverage or gearing, as it is called, comes in. What exactly is gearing or leverage in this context?
Having a loan to invest is the process of borrowing money for investment purposes. For instance, this could be a loan to invest in shares, which is the purpose of this article. However, it is important to note that this practice is not only suitable for individuals who do not possess the financial resources to invest.
Some who have the funds also borrow to invest a lot more than they can with their funds. The fact that there is lån til aksjer which is the Norwegian translation of loan for shares, makes this highly possible. While using such credit lines is a possibility, it is important to have smart strategies to help make the most of such credit lines.
Some of these strategies will be disclosed here in this article. But first, let us find out if taking out loans for shares is a good practice.
Should You Take Out a Loan to Buy Shares?
There is no definite answer to the question of whether or not loans should be obtained for this purpose. The truth is that it can be a smart as well as foolish decision. The exact answer depends on especially two factors:
Kind of Loan
For starters, consumer loans are not best suited for the purchase of shares or other speculative assets at large. By and large, they increase the risk margin that comes with this investment because of their peculiar features.
For example, their interest rates can make the value appreciation of a person’s shares seem like nothing. For reasons such as this one, it is not the ideal kind of credit line for this purpose.
Rather, some other special credit lines are better suited for people who need borrowed funds to purchase shares or other speculative assets. Mortgage refinance loans and securities financing are prime examples of credit lines that are better suited for this purpose.
Knowledge of the Market
The practice of gearing is best done by people who understand the stock market very well. Their experience and expertise put them in a better position to make smart decisions. As a result, there is a significantly reduced chance of recording losses.
On the other hand, people who know very little or even nothing about the market are in a disadvantaged position. They can make inappropriate trading decisions as a result, increasing the chances of recording losses rather than the intended gains.
All thispoints to the fact that knowledge of the stock market is essential for traders in the market. This is especially true for those taking huge risks by gearing. You can watch this video to learn some stock market basics to get you started.
Smart Strategies for Borrowing Money to Buy Shares
The riskier an endeavor is, the more caution is required. Trading on the stock market can be very profitable, especially in the long run. However, it remains a risk. As a result, players in the market need to be cautious.
Furthermore, borrowing money to buy market shares even makes it riskier. This is why people who engage in this practice need to be even more cautious. They need to implement strategies that protect them as much as possible. Some of these strategies are discussed below:
Be Well Aware of the Risk
A good investor does not only think about the gain prospect but the cost as well. In all fairness, this is the clear-cut difference between a gambler and an investor.
Bearing this in mind, make sure you are aware of the risks involved if things do not turn out as hoped. For one, this would help you put some boundaries in place.
Have a Solid Plan
Do not just delve into the market without a plan. Doing that would be very risky and could cost you a lot. So, you should have a plan that should take cognizance of the risks involved as discussed early on.
Your well-informed plan needs to touch on various subjects. Investment diversification is a major area that your plan should address. Diversification reduces loss margin, if you have to deal with losses. This is because your investment portfolio is diversified. This is rather than being solely dependent on the fate of one kind of stock.
Ensure Wise Use of Margin
Funds required for the purchase of shares can be obtained from several places. For example, while traditional financial institutions are prime examples, brokerage services can serve as creditors as well. This is known as a margin account and the funds obtained can be used to purchase assets such as bonds, options, and stocks.
In situations in which funds are secured this way, several helpful tips ensure that things play out the best way possible. For starters, such funds should not be secured until the terms & conditions are well understood.
Furthermore, the funds offered should not be maxed out. In other words, do not use up every bit of it. Using up every bit of the offered funds can put you in a difficult situation if/when the market value of your purchased stock(s) experiences a value decline.
This is because the brokerage service provider would usually have the legal right to trigger what is known as a margin call. In other words, your stock(s) will be liquidated, which is not usually in the best interest of the borrower.
The reason is that funds from the liquidated speculative assets will be channeled toward offsetting the debt and the accrued interest. This could leave the investor with very little or nothing.
Have Risk Management Strategies in Place
“Hope” is not the same thing as “plan” in the business of investing. For a shareholder, the hope is that the value of the stock appreciates significantly. This allows for earning a lot more in dividends or even liquidating the speculative asset at a selling cost that is a lot higher than the purchase cost.
While this is what is completely hoped for, it should not be what is completely planned. There needs to be a plan in case things do not happen as hoped.
In other words, there must be risk management strategies in place to mitigate the effect of losses, if they happen. For example, this might be an automated adjustment of one’s position when certain levels of losses are recorded in the market.
Choose the Right Stocks
This is one of the most important strategies. A lot of the other strategies even hinged on this particular one. So, it ought to be taken very seriously.
Do not choose stocks randomly. Rather, do your in-depth research and ensure that you choose the right one. For example, you may choose to invest in experienced companies known to have very strong fundamentals.
Wrap Up
The act of gearing can be a smart as well as a foolish decision for stock traders. It is a question of the choice of secured credit line and knowledge of the market as pointed out here. To this end, this is why some of the smart strategies for borrowing money for this purpose have been discussed here. You should make informed investment decisions by taking note of all these strategies going forward.