You should not borrow money (use leverage) to acquire any investment incomes.
Sometimes people want to get started with investing, but they don't have any money. They're impatient, however, so they think about how to raise some cash, and see empty space on their credit cards.
Others have enough money with which to open a brokerage account approved for margin trading. They're so sure they have a winning stock, they decide to borrow money from the brokerage (trading on margin) to buy up to twice as many shares of the company they're so certain will be a winner for them.
Don't Be So Overconfident You or Anyone Else is an Investing Genius
This behavior is easy to rationalize, when you're so confident you're right and you have a winning stock picking system, a winning market timing system or you're reading the newsletter or watch the cable TV show of a fabled investing guru.
Just get started, make enough money with which to pay back the brokerage or the credit card company (or set up a stream of income with which to do so), and you're on your way.
This kind of thinking is quite dangerous to your financial health.
Credit Cards Must Charge Higher Interest Rates Than Investments Pay
First of all, although you can get low, "teaser" rates on credit cards, they're only temporary. In six months or so the rate will shoot up to twelve, fifteen or even thirty percent -- depending on your income, the amount you owe and other credit history.
You cannot put your money into any kind of financial instrument to set up an investment income high enough to pay off that high of an interest rate.
Investments that pay interest, such as bonds, will not pay as much in interest as your credit card company will charge you.
That's only logical. Companies don't make a profit by loaning out their money at an interest that's lower than what they have to pay for it. They want to take in more than they pay.
Heck, if Mastercard and Visa could receive a higher interest rate from buying bonds, they wouldn't take the risk of loaning it to you and me, now would they?
Therefore, the market rates of interest for certificates of deposit, money market funds and bonds of all types -- even below investment grade or "junk" bonds -- must be lower than what the credit companies charge us.
Stock Dividends Grow Over Time, but Not Fast Enough to Justify Borrowing Money
Dividends do increase over the years, so eventually the stock now paying $1 per share will pay $5 per share, but that will take many years. Paying the minimum balance plus interest on that credit card will drain you financially long before the dividend goes high enough.
Without a Crystal Ball, You Can't Depend on Growth Stocks
If you're investing for capital gains, you're sure that your stocks will go up in price so you can sell off a few shares to repay the money to the brokerage, leaving you with lots more shares than you could have otherwise afforded.
That's a nice plan if you can get away with it. But the records of stock pickers and gurus is no better than chance.
Growth Stocks Haven't Growth For the Past Eleven Years
Plus, the market as a whole is still where it was in the spring of 1999 -- so it's gone nowhere for eleven years. If you'd bought growth stocks on margin back then, you'd still be paying interest on the money you borrowed.
Yes, in the fall of 2007 it went up to 14,000. Maybe you would have sold off your stocks then to pay off your broker. But the remaining shares would now be worth what they were early in 1999. You'd still be waiting to be reimbursed for all the interest you paid 1999-2007.
Did You Know the Peak When the Dow Jones Hit It?
And most people aren't lucky enough to get out at the exact market highs. They sell too quickly, or wait for it to go higher, and watch it change direction (in this case, it broke below 7,000 in March 2009.)
And even if you do pick a winning stock, you have no guarantee it will go straight up in price beginning the day you buy it. It could go down first, and many do.
Even if You're Right in the Long Run, in the Short Term You Can Lose Money to Margin Calls
That means your position in the portfolio will go below 50%, which could trigger a margin call from your broker. If you don't have extra money to send them immediately, they'll sell some of your shares of stock whether you like it or not.
In effect, shares of stock you buy on margin are not really yours at all -- they're under the control of your brokerage firm which will do what it has to do to protect its own interest, based on the unpredictable and uncontrollable ups and downs of the market.
Leverage Increases Your Profits, When You Have Them
When you use leverage to invest, you increase your profits -- but only if you have some.
If you use $5,000 to buy 100 shares of stock at $50 per share and it goes up by $5 per share to $55, your net portfolio has gone up 10%. From $5,000 to $5,500.
If you use $5,000 of your own money and $5,000 on margin from your broker to buy 200 shares, you start out with $5,000 net equity ($10,000 - the $5,000 you owe the brokerage) portfolio. If the stock goes up by $5, your net goes from $5,000 to $6,000 ($5 X 200 shares = $1,000 increase. That's a 20% increase.
Leverage also Increases Your Losses
If you have a loss, you also increase your loss.
If the stock goes down by $5, in the first scenario you lose 10%, because you go from $5,000 to $4,500.
When you use leverage, you go from a net of $5,000 to a net of $4,000. That's because you lose $5 X 200 shares = $1,000. You still owe the brokerage the full $5,000. So $5,000 - $1,000 = $4,000. That's a 20% net loss.
Neither you nor any guru or software program can foretell the future without enough accuracy to compensate you for using leverage when you invest. No investment incomes will be high enough to repay your additional interest expense.
Author Resource:
You can begin to accumulate a thick portfolio of income producing assets. Click here to get the information you need to effectively make money from your investments whether the markets go up or down. If you're ready to discover how to create investment incomes, visit this page, enter your email address into the form and click on the Submit Button. Then go to your inbox and verify that. It's free for the taking. http://www.incomeinvesthome.com/.
![[Valid RSS feed]](http://www.adfreearticles.com/images/icon_Rss.png "XML Feed For RSS"){kind=icon}
Category Rss Feed
Print This Article
Add To Favorites
![[Valid RSS feed]](http://www.adfreearticles.com/images/rss.jpg "XML Feed For RSS")