There is a famous saying “Borrowing and Spending Is Not The Way To Prosperity”.If you want to be rich, then borrowing is something you must never do. What about borrowing to invest in the stock market? Investing in good stocks gives you high returns in no time. You can pay back the borrowed money and then….The Profits Are All Yours.ButBorrowed money is not free.You have to pay interest on it. So what? The money you make in the stock market,will easily help you pay this interest. It’s the season of the bulls. Yes…It’s a bull market. Any stock you touch is going up. You have….The golden touch. Whatever you touch turns to gold. You are Warren Buffett…George Soros…Benjamin Graham…all combined. How can you ever lose money in the stock markets? It is wise to be cautious in these exciting times. Remember, “Fools rush in where angels fear to tread”. If this was so easy, everybody would be borrowing and investing in stocks. There has to be a catch… Yes, borrowing to invest in stocks could mean falling in a well so deep, there’s just no coming back. Want to know why borrowing to invest in stock markets is so dangerous?
Investing in stocks brings out emotions you never thought you had. Greed….Thrill…Fear….Panic…Despair. How about an interesting story?Anish who was 32 years, worked as a manager in a small factory. He loved his job, but not his salary. He earns a net monthly salary of INR 35,000. Anish was a heavy spender and his salary was never going to be enough.Anish made a resolution…”I want more money…fast. I can’t wait till I am old to enjoy myself”.This is when Anish decided to turn to the stock market, to get out of his misery. But Anish faced a small problem….He had no money to invest in the stock market. This is when a friend gave Anish a suggestion which seemed a great one at that time. Avail a personal loan and invest in stocks.Anish knew that banks would never give him a loan, if he told them he wanted the money, to invest in stocks.Anish also knew he did not have to give any reason to the bank, to avail a personal loan. Banks sanction a personal loan without asking for any reason.Anish availed a personal loan of INR 5 Lakhs at an interest rate of 18% a year. The tenure of the personal loan was 2 years. Anish has to pay an EMI of INR 25,000 a month.Anish invested the INR 5 Lakhs in stocks.
The stock market was enjoying a bull run and almost all stocks were zooming. The INR 5 Lakhs Anish had invested in stocks,was soon heading towards INR 7 Lakhs.Within a year the money Anish had invested in stocks had almost doubled. Anish borrowedmoney from friends to pay the EMI on the personal loan.Anish promised his friends….I will return your money soon. I am making bumper returns in the stock market. After enjoying a bull run for a year, the stock market crashed.Anish was not too worried…He still was in profit. The stock market was steadily falling, but Anish kept telling himself…This is all temporary.The stock market will soon go up. Finally after a big crash in the stock market, Anish was filled with panic.The INR 5 Lakhs he had invested in stocks, was nowworth just a couple of lakhs. This is when he made an even bigger mistake.He sold all his stocks at a heavy loss, instead of waiting for the stock market to rise. He repaid this money to his friends. However Anish had to still pay back some of his friends and he had EMI’s left on the personal loan.Soon Anish fell behind in his EMI repayment. His CIBIL score fell. Worse…His mobile was always ringing. His friends and the bank wanted their money back. Anish had fallen into the loan trap.
SEE ALSO: Personal Loan For Vacation
Today, loans come in different shapes and sizes.You have to recognize loans for what they are. You love investing in stocks. You are greedy to make more money in stocks. But you do not have the money to invest in stocks? This is when your friendly stock broker offers you margin trading.This is a very common tactic, where the stock broker encourages you to borrow and invest. The stock broker allows you to invest more money than you have in your account.He says…Don’t worry…With margin, you can invest twice the money you have in your account.We will give you the money. You don’t realize it at that time, but this is actually a loan. You have to pay interest on this borrowed amount. Your stock broker hascleverly made you avail a loan. He knows your weakness….GREED. If you make a profit by investing in stocks using the margin (extra money lent to you)…All’s well. You repay the borrowed amount and interest to the stock broker and enjoy your profits. But what happens if you suffer a loss by investing in stocks? Let’s say you had INR 1,00,000 in your account. Your stock broker offers you a margin of INR 1,00,000. This is an extra amount of INR 1,00,000 to invest in stocks. Unfortunately the stock market crashes and your investment is worth only INR 50,000. You are in a mess. You have to repay INR 1,00,000 to your stock broker, along with whatever interest he charges you for the margin facility. You fall into the loan trap.
See Also: Stock Exchanges In India
Borrowing to invest in the stock market is a really bad idea.You lose your own money, No problem..It’s your mistake. You lose someone else’s money, you have a big problem.If you lose your friends money….stockbrokers money…banks money…They will harass you until you pay it back. This can lead you to utter despair.Your family will also suffer for your mistake. Invest in the stock market with your own money after taking care of all your expenses. Invest only what you can afford to lose.
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Mr. C S Sudheer is the founder and CEO of IndianMoney.com – India’s largest Financial Education Company. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.
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