Borrowing to Buy shares

P

phoenix_n

Guest
I was just thinking about the pros and cons of borrowing money to invest in the share market. ( or more precisely to 'gamble' on the increase of one or two stocks)

I guess the major cons against of such a practice would be; the risk involved, the rate of interest of the borrowed money, and capital gains. (anything else?)

Can you even get a personal loan without justifying why.

So assuming you borrowed 100euros to buy 100 shares at 1 eur each, what kind of a share increase would you need to make an increase that would be worth the increased risk ?

Came across this article.
http://www.theage.com.au/news/money...1139542439802.html?page=fullpage#contentSwap1
 
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I'd imagine you'll find it tough to get a loan for gambling purposes. However, I could be wrong in saying that.

In terms of a target return, you'll need to consider the following (assuming you purchase shares):

1. Stamp duty on ISEQ quoted stocks is 1% (UK, US is 0.5%)
2. Dealer's spread (price difference between what you'd buy and sell for right now) is probably another 1% (but can be higher depending on the liquidity of the stock)
3. Minimum charges in dealing with most brokers are c.€100 on each side (buy and sell) and are based on a percentage of the transaction value
4. The cost of financing your loan
5. Whatever return you think is reasonable for the risk you're taking (should vary based on the Beta factor or riskiness of the share(s) you choose to buy)
6. Should you gain more than €1,270 on the sale of the shares, you'll be liable to CGT at 20%

You'll need to add up all these percentages to get an idea of the real return you should be targeting.

Another option is to spread bet on shares. Costs are much lower and no capital gains or stamp duty applies. Also, you only need to put 10% / 15% of the money up front, which will greatly reduce your borrowing costs. I won't go into this option any further as I'm sure there are already various threads here on it.
 
I bought bank shares last year and they're up 20%. Asides from dropping .6% on purchase, probably another 1% on sale and paying cpital gains of 20% it was absolutely a worthwhile investment.

I think there are a lot more people out there oggling the 2006 returns who will hop in in 2007. Im going to borrow on bluechip shares as i reckon i can handle the potential loss but the potential to gain is stronger in my opinion if you choose relatively good shares.
 
Trent
With spreadbetting dont you have to lay out a price you think the shares will realise within a given period i.e. you cant just take a punt, ride the year out and sell at year end?
 
Keentoinvest said:
Trent
With spreadbetting dont you have to lay out a price you think the shares will realise within a given period i.e. you cant just take a punt, ride the year out and sell at year end?
Click to expand...

That's correct Keentoinvest. Spreadbetting generally takes the form of bets closing every quarter (so your punt will be for less than 3 months), but can be as long as 6 months. You still have the option to roll the bet forward at the end of a quarter for an additional cost.
 
Past performance is no guide to future returns.

Keentoinvest said:
Im going to borrow on bluechip shares as i reckon i can handle the potential loss but the potential to gain is stronger in my opinion if you choose relatively good shares.
Click to expand...
Is your opinion based on anything other than a hunch or past performance?
 

There is no stamp duty on US shares.
 

This is misleading imo. Keentoinvest queries " With spreadbetting dont you have to lay out a price you think the shares will realise within a given period ".

The answer to that question is " No ".
 
ClubMan said:
Past performance is no guide to future returns.
Thats right Clubman but hard to ignore!

Is your opinion based on anything other than a hunch or past performance?
Click to expand...
A wing and a prayer!
 
Borrowing to buy shares is certainly not something any adviser would agree with however on the back of impressive past performance and dealing with staff at this bank on a regular basis I would be very confident in taking a 'punt' . I am quite confident that it wont result in a loss that I cant cover and because I certainly dont anticipate a loss, I am willing to take a gamble!

'Fortune favours the brave'
 
Keentoinvest said:
however on the back of impressive past performance
Click to expand...
Once again, past performance is no guide to future returns.
I am quite confident that it wont result in a loss that I cant cover and because I certainly dont anticipate a loss, I am willing to take a gamble!

'Fortune favours the brave'
Click to expand...
A fool and his money...
 
ClubMan said:
Once again, past performance is no guide to future returns.

A fool and his money...
Click to expand...

Maybe a bit harsh ?
There are slogans for all sides.. e.g.
You have to speculate to accumulate.

But....It is an option worth looking at. One option is to put your money into a deposit account (northern rock etc) and try to beat inflation but is not real investing but merely trying to stand still.

I think though that to invest (borrowing for shares) you really need at least 50% LV ratio.
 
Thats the spirit Phoenix
Good to see someone else with a pair of nuts

Clubman: Im coming knocking in 12 months, you never know, I might even provide you with a quarterly update
 
phoenix_n said:
Maybe a bit harsh ?
Click to expand...
Just countering one cliché with a different one. However it is arguably an apt one in the context of somebody borrowing to invest in shares on a hunch/wing/prayer and based on past performance. They might be lucky but the risks (of losing more than your own money) are significant.
 
Clubman
Enough of your pessemism, Im coming knocking in 3 months!
Back to work!
 
Reading this and some of the other stock market threads that have sprung up since the new year makes me think that there are a lot of ill-informed people out there looking to put their money into stocks. The late-90's bubble was driven primarily by people like this who did not have a clue what they were doing - no disrespect to any of the posters on here, but the level of ignorance as indicated by some of the questions asked here is astonishing!

If there are enough people like this, sure the market will go up and they will be "right". But is that investing????
 
Keentoinvest - my main point is that the risks that you are undertaking with this approach are significant. Not only are you gearing but you are also selecting stocks with little or no technical or fundamental analysis or assessment of the underlying value and strength of the stock/company as far as I can see. You seem to be convinced more by past performance and warm fuzzy feelings about good experiences with customer service than anything else. You could well make money in three months. If you do I'll be very happy for you - especially if it's cash in hand after tax rather than just paper gains. But others reading this who are looking for more balanced/prudent advice/comments should bear in mind the significant risks involved. For some people such a high risk strategy might be suitable (I'm not saying that this is the case for you because I don't know enough about your overall situation) but for most it will not be. Good luck.
 
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