Investment Borrowing



A popular wealth creation strategy for many investors is the use of gearing. Gearing is chosen due to the increased potential for profit.

Instead of buying $40,000 worth of shares and growing this to $55,000 you could buy $100,000 and watch it grow to $150,000. There are a number of options available when using gearing but the most popular are:

  • Use of equity in the family home.
  • Take out a margin or personal loan.

There are risks involved. One of the potential risks is that due to gearing being a debt, the interest rates could rise. It is important to do the numbers before a loan is taken out so that you know for sure that you could meet the loan repayments in the interest rates rise.

If a margin loan is used then the stock that is bought is used as the collateral for the loan. A risk associated with a margin loan is if the market drops and the value of the shares decreases. The bank can demand some money back and you will receive a margin call. A margin call is a demand by the lender for you to provide either cash or more security when your investment drops below an agreed level.

Gearing should onl...

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