Borrowing to Buy shares

[whathome]

I once read that of a stock's move, 31% can be attributed to the general stock market, 12% to the industry influence, 37% to the influence of other groupings and the remaining 20% is peculiar to the individual stock.

Over what period of time are you referring to - a day, a week?

If you are a trader or you are purchasing a tracker - sure the level of an index is important. From your ID, I'm guessing you are interested in trading, possibly using charts (technical analysis)???

As an investor, I'm only interested in the company I'm buying. Does it fulfill my investment criteria? is it at a price that's attractive to me? The level of some market index is completely irrelevant. I'm buying the future earnings of a company, not a ticker symbol or an index. The last company I bought shares in (December) was a rapidly growing German financial services company. PEG ratio 0.5, excellent management, very profitable, no debt, growing market and at a wonderful price. I spent about two months analysing the company before deciding to buy. Most likely I will still hold the shares in five years time. Did I look at the German DAX index? No!

Back to phoenix_n's question - If an inexperienced investor wants to sleep at night, borrowing to buy shares is not a good idea. Borrowing to trade is crazy unless you're very experienced.

 

[demoivre]

Avoid borrowing and use a margin account instead (forcing you to cut your losses if the loss exceeds the margin). No borrowing costs and losses are limited to the margin.

This is not accurate. There are different types of margin account and you do have borrowing costs for many of these accounts and your losses are not limited to your margin. If you buy shares on margin through a broker there are financing costs or if you are long shares via CFDs there are financing costs. Brokers will generally close out an open position if there isn't enough margin in the account to maintain that position but sometimes it may not be possible for them to do so eg FTSE futures don't trade overnight and may open at 8.00 am 30 or 40 points against your position in response to what has happened in Wall st or the Far east. In these cirumstances your losses are not limited to the amount of margin in your account - you are responsible for your total losses.

 

[room305]

This is not accurate. There are different types of margin account and you do have borrowing costs for many of these accounts and your losses are not limited to your margin. If you buy shares on margin through a broker there are financing costs or if you are long shares via CFDs there are financing costs. Brokers will generally close out an open position if there isn't enough margin in the account to maintain that position but sometimes it may not be possible for them to do so eg FTSE futures don't trade overnight and may open at 8.00 am 30 or 40 points against your position in response to what has happened in Wall st or the Far east. In these cirumstances your losses are not limited to the amount of margin in your account - you are responsible for your total losses.

Slippage is extremely rare unless the market moves very fast and/or you are flying close to your margin limit. I do not see how a margin account could incur borrowing costs so perhaps you could explain this to me. CFDs are a different story entirely and I do not think they were mentioned in the OPs context.

Obviously there are financing costs if you buy shares on margin through a broker (same as if you buy and hold) but I fail to see how this makes my comment inaccurate.

 

[demoivre]

" Slippage is extremely rare unless the market moves very fast and/or you are flying close to your margin limit."

Slippage isn't affected by margin but by market liquidity.


"I do not see how a margin account could incur borrowing costs so perhaps you could explain this to me."

It' s investing 101 that a margin account attracts interests charges because you are borrowing funds from the broker - do you think you get the funds for free? Do the most rudimentary of Google searches on " margin trading " and you will see that what I am saying is correct. Better still read the t & c's for any margin broker and they will explain that you can lose more than you have on margin and that there are interests costs associated with borrowing from your broker ( you contended above that in a margin account there are " No borrowing costs and losses are limited to the margin " - me saying that that is an inaccurate statement is being kind to you ! )

"CFDs are a different story entirely and I do not think they were mentioned in the OPs context."

I mentioned CFDs to show that there are different types of margin accounts and that these CFD accounts will also attract financing charges for overnight long positions and you can lose more than you have on deposit.


"Obviously there are financing costs if you buy shares on margin through a broker (same as if you buy and hold)"

Buying shares on margin incurs physical interests costs payable to the broker because you have borrowed from him but subject to margin you can buy and hold in a margin account. Buying and holding in a cash account is different because there is no interest cost payable to the broker because you haven't borrowed from him - you do though have to take in to consideration the opportunity cost of the funds you are tying up - that cost also applies to the deposit that you would place in a margin account.



"but I fail to see how this makes my comment inaccurate".

Are you any the wiser now ?

 

[room305]

Are you any the wiser now ?

Apologies I was thinking in terms of a futures contract rather than direct purchase of shares. With a broker margin account for futures trades there will be no borrowing costs.

However, direct purchase on margin, even with borrowing costs may be suitable for the OP as it would allow gearing for investment. I'm not sure how much gearing though, probably only 50% or so. Also I have no idea what the interest rate charges are like.

If they are unduly concerned about stop losses or margin limits being exceeded (relatively rare) then they could focus on options trading. This would again allow leverage, incur no borrowing costs and the maximum loss would absolutely be limited to the premium paid for the option.

 

[phoenix_n]

options trading.

Ok read up on this but could someone go thru how it would actually work.

 

[demoivre]

Ok read up on this but could someone go thru how it would actually work.

You will find all this on the www with worked examples for the relatively straightforward concept of buying a call or put option to writing ( selling ) a call or put to strategies such as spreads and combinations. Look in [broken link removed] for example.

 

[phoenix_n]

You will find all this on the www with worked examples for the relatively straightforward concept of buying a call or put option to writing ( selling ) a call or put to strategies such as spreads and combinations. Look in [broken link removed] for example.

Thanks for the link. Will read thru it. Is option trading (say online thru goodbodys) as easy as buying shares.

 

[demoivre]

Thanks for the link. Will read thru it. Is option trading (say online thru goodbodys) as easy as buying shares.

Well I have never used Goodbody so I don't much about them. In general though there isn't a straightforward answer to your question because it depends on what you are doing with the option eg not all brokers will allow you write an option to open a position particularly if it's a naked option because they are very risky. The liquidity of options can also be influenced by factors such as the underlying stock, time to expiration and whether the option is in or out of the money so there is really no simple yes or no answer to what you have asked.

 

[charttrader]

I would advise any beginner to steer clear of options. Learn to walk before attempting to run.

 

[kmcg]

personally i think if you are on this website asking should you borrow money to invest in shares then the answer is definatley no. In general it is not a good idea to do so. maybe if you are very financially knowlegable and very wealthy (but your wealth is tied up in illiquid assets hence the need to borrow). Shares are very risky, even something solid like an AIB could lose 10-20% in a short space of time - see last May. It is true that a well balanced portfolio should do well in over the long term but if you have borrowed for your position can afford the repayments while waiting for it to come good. My advice - dont do it - cant think of many people who would advise for it. A house it makes sense to borrow against but not shares which are riskier and can't keep you warm in the winter