Buying and trading shares are established measures in today’s economy. So it is no surprise that private and business investors always reflect on how to expand and fully exploit their opportunities. In consideration of the current low level of interest rates on the credit market, the focus is also on loans as a possible financing solution. Investors who do not want to use their own capital can borrow money from a bank. This money is then invested in the acquisition of shares. It is obvious that this can be a risky endeavour. It is therefore certainly interesting to take a closer look at the advantages and disadvantages of buying shares on credit.
What are the advantages of buying shares on credit?
First of all, it is worth taking a look at the advantages of buying shares through a loan. It soon becomes obvious that the possible plus points are strongly dependent on the current situation. Investors should therefore not solely rely on the advantages.
Greater room for manoeuvre
As a matter of fact, taking out a loan expands one’s own financial framework. According to toptarif.de, taking out an installment loan can be included quite well in future planning: “The advantage of an installment loan is that the monthly installments remain the same over the entire duration. Therefore, customers using this form of credit can plan the load of their monthly installments well until the total amount has been paid off.”
It becomes apparent that an investor who takes out a plannable installment loan and invests the obtained sum in shares will possibly be able to buy more promising shares. So it is no surprise that the number of loans to buy shares has risen to a record high last year, as mentioned in the German Business News. However, investors should always keep in mind that the financial resources from a loan are merely borrowed.
Getting started is possible without preparation
Anyone wanting to start trading in shares obviously needs the appropriate financial resources. However, they are not always readily available. It can take a while to convert potentially invested money into cash.
As a result, spontaneous entry is often not possible. The situation is different if stock trading is entered on the basis of a loan. Even if loans are usually invested in consumer goods such as cars or vacations, they can also be used for buying shares as long as the issuing bank does not veto them. Any (daring) investor can therefore enter into stock trading quickly and without any significant preparatory measures via a loan.
Chances in bottom fishing
Experts recommend taking out an online loan to finance the purchase of shares, especially for so-called “bottom fishing”. This refers to the purchase of shares that have experienced a significant downturn of more than 50 percent.
Shortly before such a share rises again, it is “on the ground” for a little while. Clever investors use this time to invest in stocks and then profit from the rebound. Of course, bottom fishing is also a purely speculative process, as the actual bottom of a stock can only be assumed. However, anyone deciding at the right time and buying a currently low share with a loan can already make profits after a short while.
What are the disadvantages of buying shares on credit?
In general, buying shares on credit should be treated with caution. It is therefore particularly important for investors to be aware of the potential disadvantages of their actions. In this case, investors are threatened by the danger of possible losses in several ways.
The risk of double loss
The development of a share can usually not be determined with certainty. Even promising stocks have disappointed their buyers in the past, either by rising only slightly or even leading to losses. For the investor who enters the stock market via a loan, the drop of a share is a great risk.
After all, the liability for the loan taken out is independent of the success of the share. It is therefore clear that even in the event of a total loss, the outstanding loan amount must be repaid in full. In the worst case, the investor is then exclusively occupied with repaying the loan without having created any income from the share transaction in return.
Profits are harder to achieve
In order for the purchase of shares via a loan to be worthwhile, a number of conditions must be met. Investors should not only keep an eye on the sum of the loan, but should also consider the accruing interest.
Anyone taking out a loan therefore does not only repay the corresponding sum but is also responsible for the amount of interest. Thus a purchased share must not only cover the sum of the loan, but also facilitate an increase in value that also covers the amount of interest. The borrower therefore may have to wait much longer and has to expect much higher increases in order to be able to cover the entire credit costs.
The debt trap snaps quickly
The fact that a loan can quickly develop into a kind of downward spiral is not only a problem in the equity business. If money is borrowed to make investments, one always risks one’s own financial resources. In the case of a loan taken out for the purchase of shares, many investors are very quickly willing to expand the credit line in favour of the share transaction. This may happen, for example, if additional money is needed due to possible losses. Those borrowing more and more money automatically slip deeper into their liabilities towards the bank.
Conclusion
Buying shares on credit is a risky business. Those who are unfamiliar with the events on the stock market will quickly endanger themselves, because high losses and the double burden of the borrowed credit can quickly endager their existence, depending on the amount of the investment. Investors who are well versed and would like to speculate with modest sums can nevertheless consider the option of taking out a loan. It is crucial that the credit should not be taken up without available securities. So anyone who initially seeks advice and keeps a realistic eye on his or her own financial possibilities can use a loan as a worthwhile instrument. For beginners, however, it is highly recommendable to invest small sums first and thereby gain a feeling for the stock market.