# Borrowing to Buy shares



## phoenix_n (9 Jan 2007)

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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## Trent (9 Jan 2007)

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.


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## Keentoinvest (9 Jan 2007)

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.


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## Keentoinvest (9 Jan 2007)

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?


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## Trent (9 Jan 2007)

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?


 
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.


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## ClubMan (9 Jan 2007)

Keentoinvest said:


> 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.


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.


Is your opinion based on anything other than a hunch or past performance?


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## demoivre (9 Jan 2007)

Trent said:


> 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%)



There is no stamp duty on US shares.


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## demoivre (9 Jan 2007)

Keentoinvest said:


> Trent
> With spreadbetting dont you have to lay out a price you think the shares will realise within a given period



No.


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## demoivre (9 Jan 2007)

Trent said:


> 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.



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 ".


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## ClubMan (9 Jan 2007)

demoivre said:


> There is no stamp duty on US shares.


Or on _ETFs_ - for example.


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## Keentoinvest (9 Jan 2007)

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?


A wing and a prayer!


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## ClubMan (9 Jan 2007)

Hardly a prudent basis for investing so? Sounds more like gambling.


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## Keentoinvest (9 Jan 2007)

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'


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## ClubMan (9 Jan 2007)

Keentoinvest said:


> however on the back of impressive past performance


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'


A fool and his money...


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## phoenix_n (9 Jan 2007)

ClubMan said:


> Once again, past performance is no guide to future returns.
> 
> A fool and his money...


 
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.


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## Keentoinvest (9 Jan 2007)

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


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## ClubMan (9 Jan 2007)

phoenix_n said:


> Maybe a bit harsh ?


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.


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## Keentoinvest (9 Jan 2007)

Clubman
Enough of your pessemism, Im coming knocking in 3 months! 
Back to work!


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## Markjbloggs (9 Jan 2007)

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????


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## ClubMan (9 Jan 2007)

_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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## Smi1er (19 Jan 2007)

ClubMan said:


> Once again, past performance is no guide to future returns.
> 
> A fool and his money...





phoenix_n said:


> Maybe a bit harsh ?



Not harsh at all.

Only invest what you can afford to lose. I know someone who one day his portfolio was worth £120K. The next morning it was only worth £20K. It happens, and as Clubman says past performance is no guide.

Unfortunately many people haven't lived with a stock market or house price crash. This leads to a lot of them being totally naive. It's not if it might happen, but when it will happen. Many in UK/Ireland are in credit up to their eyes. The bubble will burst. Might be tomorrow, might be in 2 years, but it will burst.

So, I wouldn't borrow anything to invest in shares.


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## phoenix_n (19 Jan 2007)

Smi1er said:


> So, I wouldn't borrow anything to invest in shares.


 
The thing is that whether the stock go up or down you still own the stocks so once you can pay back the loan you have not lost anything. 

People have been heavily borrowing to invest in property in Ireland (speculating) for the past 5 years and whilst the rates of interest are lower , it is nonetheless just as risky if not more illiquid than stocks.

But i do agree that only invest what you can afford to lose.


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## ClubMan (19 Jan 2007)

phoenix_n said:


> The thing is that whether the stock go up or down you still own the stocks so once you can pay back the loan you have not lost anything.


Huh!? If I borrow €10K and buy shares with it then I have €10K worth of shares and a debt of €10K. If, the next day, the shares crash and are now only worth €1K then I can sell them and pay off €1K of the loan but I am still €9K in debt. On the other hand if I have €9K in savings then I can clear the loan with that but I have now lost €9K!


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## phoenix_n (19 Jan 2007)

ClubMan said:


> Huh!? If I borrow €10K and buy shares with it then I have €10K worth of shares and a debt of €10K. If, the next day, the shares crash and are now only worth €1K then I can sell them and pay off €1K of the loan but I am still €9K in debt. On the other hand if I have €9K in savings then I can clear the loan with that but I have now lost €9K!


 
Yep. But one would have to be flexible on the short to medium term. If you were working on the short term and the shares dropped you have to be able to change your strategy to medium to long term.( i.e. do not sell at a loss. ) until the share price regained its value.

Yes there is risk involved but i am working from the assumption that worst comes to worst , you will have X shares that you can just keep until you regain your losses. 

The sensible strategy would be of course to buy shares every month (disregarding commission for now)with what you would pay back for the loan. And that would give you your spread. That would work fine unless you anticipate a bull market.

Alternativley one could just put it in the bank, buy a volvo and be content to work to 65. 

I am not saying that i am right,far from it, but just exploring ideas.

Your logic above can be applied to any investment (eg property) so your 'huh' remark is a bit unkiind.


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## charttrader (19 Jan 2007)

_The thing is that whether the stock go up or down you still own the stocks so once you can pay back the loan you have not lost anything.

_To quote Jim Rogers - There is no such thing as a paper loss.  A paper loss is a very real loss.

_But one would have to be flexible on the short to medium term. If you were working on the short term and the shares dropped you have to be able to change your strategy to medium to long term.( i.e. do not sell at a loss. ) until the share price regained its value.

Yes there is risk involved but i am working from the assumption that worst comes to worst , you will have X shares that you can just keep until you regain your losses.

_This aversion to taking a loss could put you in dangerous places.  Shares don't always bounce back.  To quote Rogers again - the first loss is the best loss. Keep them small. 

If you're investing for the long run and are not bothered about the vagaries of the share price movements, fine - buy and hold.  But you seem to be suggesting that you are hoping for some short term gains (trading) but are willing to hold on for the long term (investing) if things go against you.  That's a  high risk combination.  It sounds a bit like the old Wall st. joke that a long term investment is a short term speculation gone wrong. 

Not taking a loss is a bad habit to get into.  Most of the time, you'll get away with it, but eventually something drastic will happen and you'll be in trouble.


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## Markjbloggs (19 Jan 2007)

Agree with Charttrader - always cut your losses and move on.  Trading 101, as they say.


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## phoenix_n (19 Jan 2007)

Markjbloggs said:


> Agree with Charttrader - always cut your losses and move on. Trading 101, as they say.


 
Interesting. Will give it some thought. (thanks charttrader for your input aswell.)


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## room305 (19 Jan 2007)

Would agree with the above two posters. If your strategy is to come out ahead by year end (short term) then make sure you have a stop loss in place to cut your losses if the trade goes against you. 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.

Otherwise you are investing for the long term (buy and hold) in which case, I would still avoid borrowing. Try saving and buy more stock whenever the price is favourable. The market often over-reacts to certain events (e.g. profit warning, accounts revisions etc.) and if you are happy with the long term direction of the company these can present good buying opportunities.


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## proinnsias (19 Jan 2007)

biam geared equity fund 54% return 2006


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## phoenix_n (19 Jan 2007)

Cheers. Only a rookie at the moment so happy to take on any advice.



room305 said:


> Would agree with the above two posters. If your strategy is to come out ahead by year end (short term) then make sure you have a stop loss in place to cut your losses if the trade goes against you. 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.
> 
> Otherwise you are investing for the long term (buy and hold) in which case, I would still avoid borrowing. Try saving and buy more stock whenever the price is favourable. The market often over-reacts to certain events (e.g. profit warning, accounts revisions etc.) and if you are happy with the long term direction of the company these can present good buying opportunities.


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## rusty (19 Jan 2007)

Somebody mentioned us shares

    Don't die holding them. ---------------  Your estate (the part of it in US shares) will be subject to US estate tax 0f 50%.


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## Persius (19 Jan 2007)

phoenix_n said:


> ClubMan said:
> 
> 
> > Huh!? If I borrow €10K and buy shares with it then I have €10K worth of shares and a debt of €10K. If, the next day, the shares crash and are now only worth €1K then I can sell them and pay off €1K of the loan but I am still €9K in debt. On the other hand if I have €9K in savings then I can clear the loan with that but I have now lost €9K!
> ...



I think there's a flaw in your assumption. The worst case scenario is that the company you hold stocks in goes bust. Happened to many during the dot com boom and happened to many before that as well. Then there is no long term strategy. All your (borrowed) money is gone and the bank is knocking at your door...


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## Persius (20 Jan 2007)

And a second worst case scenario is that the share price drops hugely, and somebody decides to take the company private and manages to purchase enough shares at a huge discount to what you originally paid. You are then forced by law to sell your shares at this price, which is way less than you originally borrowed. Again there is no possibility of a long term strategy


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## kirvos (20 Jan 2007)

Hi all, Just one more cliche - 'the day you buy is the day you sell' ie. Stocks look pretty fully priced at the moment, so how much capital appreciation up ahead? 

Be slow about getting your revenge in first, so I'd be inclined to wait for the next wobble/downturn before buying in. Maybe I'm arguing that investors should be selling at the moment. 

Wisdom is 'you don't borrow what you can't afford to lose'. Excellent cautionary advise in previous posts above


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## whathome (20 Jan 2007)

kirvos said:


> Stocks look pretty fully priced at the moment, so how much capital appreciation up ahead?


 
On what basis do you think stocks look fully priced?
Are you referring to particular markets or sectors?


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## Gus50 (20 Jan 2007)

Never borrow to buy shares. If you cannot afford to lose the money don't get involved.


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## smiley (20 Jan 2007)

kirvos said:


> Stocks look pretty fully priced at the moment, so how much capital appreciation up ahead?


 
id like to know on what do you base this opinion too? tis a serious generalisation....you are implying that you can time the markets...nobody can.


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## kirvos (20 Jan 2007)

Hi, I can say the ISEQ is just beneath a record high, as is the Dow. I think the Irish market is working off a p/e of about 15, which is as expensive as it's ever been. The ISEq did dip  8pc last May./June is bout of nervousness - albeit the market climbed steadily  upward since, up to and through Xmas, ( does anyone know why?)

Since the new year, there are signs of the volatility factor rising again, meaning greater market swings as sentiment/fear takes a more central role.
Over the last 4 years the ISEQ has gained about 25pc  p.a. on average (roughly). That is major capital growth. 

I would tend towards being a seller than a buyer, given above. Either way, you pay your money and you take your chances.
Managing risk (downside) has to be central in any strategy.

Every time you buy or sell,  you are 'timing the market',   so I don't see how can NOT  but  time the market. Interesting debate.


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## whathome (20 Jan 2007)

kirvos said:


> Hi, I can say the ISEQ is just beneath a record high, as is the Dow. I think the Irish market is working off a p/e of about 15, which is as expensive as it's ever been. The ISEq did dip 8pc last May./June is bout of nervousness - albeit the market climbed steadily upward since, up to and through Xmas


 
The ISEQ is just an index - who cares what value an index is at when you're buying individual companies?  I only ever use indices to measure my own investment portfolio performance, otherwise they can be ignored.  

Also - indices are often trading at or just beneath record highs, that should never put you off buying shares where sufficient research into a particular company has been completed and a purchase decision made.

Final point - there are a lot of equity investment opportunities outside the Irish market.


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## charttrader (22 Jan 2007)

_The ISEQ is just an index - who cares what value an index is at when you're buying individual companies? I only ever use indices to measure my own investment portfolio performance, otherwise they can be ignored._ 

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.

The author of that research was writing in the 1960's.  One can argue it's outdated or that it is absurd to be so specific on such a subject. But one thing is certain - the value of the index _is_ important and dismissing it as an irrelevance will get most investors/traders into trouble.


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## whathome (22 Jan 2007)

charttrader said:


> 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.


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## demoivre (23 Jan 2007)

room305 said:


> 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.


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## room305 (23 Jan 2007)

demoivre said:


> 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.


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## demoivre (23 Jan 2007)

room305 said:


> " 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.
> 
> ...



Are you any the wiser now ?


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## room305 (23 Jan 2007)

demoivre said:


> 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.


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## phoenix_n (23 Jan 2007)

room305 said:


> options trading.


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


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## demoivre (23 Jan 2007)

phoenix_n said:


> 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.


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## phoenix_n (23 Jan 2007)

demoivre said:


> 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.


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## demoivre (23 Jan 2007)

phoenix_n said:


> 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.


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## charttrader (23 Jan 2007)

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


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## kmcg (24 Jan 2007)

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


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