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The Right Time to Borrow Against Stocks



Taking out a loan against the stocks in your portfolio comes with inherent risks. But understanding the risks and how they vary in comparison to other loans, will determine if it is the right time to borrow against stocks. Stock loans differ from traditional bank loans. However, as with any financial endeavor, there are risks. Knowing the pros and cons is the right first step to determining if a stock loan is the best option for you.
First, it is important to debunk a common misconception in that a stock loan does use your stock as collateral. Instead, the stocks in your diversified portfolio help a lender determine if you qualify and for how much. The reason some investors confuse a stock loan as using the stock as collateral because indeed, if an investor defaults, you may choose to sell those securities to make the payment. That is, if the stocks haven’t lost value. This is notable because it means when you take out a stock loan, you are taking on a debt against an asset that may not be there at the completion of the loan term.

Again understanding the difference in this type of loan comes down to scenarios – best and worst. With any loan there is risk. With this type of loan, the risks are compounded if your portfolio loses value. For instance, many investors take out a loan based on the value of their current stocks and in order to invest and purchase more shares. It is a sound financial strategy. Use other people’s money to grow your own wealth. If the stock goes up, then the borrower repays the loan and their financial growth is larger than at start of the original loan. That scenario is best-case and what is called smart money. But is the stock depreciates in value, the borrower loses money and is on the hook for the amount of the loan with no profits to pay it – worst case scenario. But in between that there are shades of gray. One can take out a loan to pay down high interest debt, freeing up more money to invest. One can sell shares in the case of depreciation to pay of the remaining balance. In any case, understanding the risk vs. reward scenarios is a good first step to making a sound an informed financial decision when deciding the exact right time to borrow against your stocks.

In the final analysis, it is best to remember that an ideal time to borrow against stocks, is when your portfolio is well established and diversified, and your finances require it. At that time, be sure to locate a reputable stock lender. The current interest ranges from 3-4%. Keeping in mind that stocks can often appreciate in the double digits over the term of a loan, for some, a stock loan is a financially sensible option.

Dupont Capital LTD

+44 20 3885 9155

info@dupontcapitalltd.net

7 Unity Street
Bristol, BS1 5HH, United Kingdom