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 only be considered if you are in it for the long term and you want to maximize the potential of your collateral. A financial planner or adviser should be consulted before using gearing or taking out a margin loan.

© 2005 StartRunGrow



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