Since stocks are risky, the only entities that will knowingly lend you money to invest in stocks are brokerage firms. Other potential sources include home equity loans, credit cards and friends/relatives. There are also trading firms that will let you trade their capital and companies that do stock loan financing. But trading firms prefer experienced traders who must have trading capital to become good in the first place, and stock loan firms lend money against existing large stock portfolios.
Use margin to buy stocks. Your broker can lend you up to 50 percent of the purchase price on approved marginable securities. For example, if you open an account with $2,000, you can buy $4,000 in stocks. Brokers charge margin interest on a sliding scale; the more you borrow, the less you pay. The interest is simply added to the amount you owe.
Borrow against your house. Do a cash-out refinancing or a home equity line of credit and deposit the proceeds into your brokerage account. The interest on your mortgage or home equity loan will generally be lower than the margin interest charged by your broker.
Get a cash advance on your credit card and deposit it into your brokerage account. This is a very expensive way to borrow. The credit card will probably charge you a 2-3 percent cash advance fee in addition to the regular interest, which can be 10-20 percent or higher. You will have to make 20 percent on your stocks just to break even--a tall order even for experienced traders.
Work out a profit-sharing agreement with a friend or relative whereby you get to keep, say, 25 percent of the profits until the loan is fully repaid. Bear in mind, though, that borrowing from someone you know can poison the relationship for years if you are not clear on the terms upfront.
Tips & Warnings
- Most mutual funds are marginable. If you have several mutual fund accounts scattered around, create leverage by consolidating them in a single brokerage margin account.
- Brokers have a 25 percent minimum equity requirement that you must maintain in your account. If the value of your account declines below that level, you will get a margin call--a demand to deposit more money within three days or the broker will liquidate your holdings to repay the loan.
- If you lose the money borrowed against the house and can't repay, you may lose your home. Your credit card debt is unsecured, but you may end up ruining your credit in bankruptcy.
- Check your mortgage lender's or credit card's terms to see if using the proceeds for investing is specifically prohibited.
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