Saving money is crucial but not enough. The susceptibility of money to inflation is a good reason why it is not enough. For example, a thousand dollars has less value than it did 5 years ago. This is because of the rise in the price of commodities, bringing down their value.
As a result, people need to think about saving money, which places a demand for investing. To this end, shares are an option for people hoping or planning to invest in. Some of the known benefits of investing in shares include:
- Capital appreciation
- Ownership stake
- Liquidity
- Dividend
- Growth potential – This is especially true in the long term
- Accessibility
- Expert management – Especially for certain kinds of shares
- Combating the effects of inflation
- Transparency
The aforementioned are more or less general advantages as some advantages are location-bound. For example, owning shares offers notable tax privileges in some places. You can click here for more information on the benefits.
While ownership of shares offers several advantages, including the aforementioned ones, is it wise to buy shares with a consumer loan? Answers to this question and other related ones will be discussed here in this article.
Should Shares Be Purchased with Consumer Loans?
Purchasing shares with consumer loans is strongly discouraged because of the several risk factors involved. While they offer numerous benefits, the risk that comes with these sorts of investments explains why it makes very little or no sense to buy them with consumer loans. Discussed below are some of the risk factors involved and how they are reasons shares should not be purchased with consumer loans:
Interest Costs
There are two ways people can earn from shares. This is regardless of the kind that they have chosen to invest in. The first is through dividends. A dividend is an amount that the shareholder earns from the profit made by the venture that was invested in. In most cases, this is usually a publicly traded company on the stock exchange market.
Except in very unusual circumstances, the dividend is nowhere near enough to pay off the consumer loan used in buying the shares, if this is the case. This leaves us with the other option.
The second way people earn from buying shares is by selling the invested financial assets. However, this would have to be at a rate higher than the purchase rate.
The problem here is that a consumer loan also accrues interest even as the share is expected to increase in value. The question is if the accrued interest on the loan is not as much as the value appreciation of the purchased share(s).
In situations in which the consumer loan’s interest is the same or even more, it is simply a bad move. In all fairness, the complexities do not end here as there are other concerns as well.
Possibility of Value Loss or Stagnation
The aforementioned point explored the possibility of shares rising in value but not at a rate that makes taking out a consumer loan for its purchase worth it. While this is a problem, another problem is that there is no guarantee of value appreciation.
While there are no guarantees of value appreciation with shares, even if likely, it is a guarantee that a consumer loan will accrue interest. This is whether it is a fixed or variable interest rate. This puts investors who take out consumer loans for the purchase of shares at a disadvantage, which is why it is not advisable to make this move.
Conflicting Periodic Focus
The hope with shares is that they experience value appreciation, which is a possibility. This is especially true when well-informed decisions are made.
But even at that, most shares that experience value appreciation do so after several years. This could be as much as 10 years or even more in some cases.
Well, it turns out that share appreciation stats and consumer loan interest features have conflicting periodic focus. In simpler terms, most consumer loans are designed to offer lenders profits within a short time frame. In most cases, this is between a year and 5 or 6 years.
The point is that most investors can only profit through dividends within this time frame. As a result, most people who take out consumer loans to purchase funds would have problems paying off their debt. Those who eventually get to pay off this debt may have to look elsewhere for a solution.
Financial Stress
The fact that a share is an investment cannot be questioned. However, it belongs to a special category known as speculative investments. The implication is that it is a kind that comes with huge risk factors. This is especially true if you opt for certain kinds.
Taking out a loan in itself is a risk taken by both the lender and the borrower. So, using a loan to purchase a share is increasingly riskier.
The reason is that you would be putting yourself under a lot of financial stress if the speculative investments do not turn out as promising as you had hoped.
Diversification Issues
For the record, this point does not apply to everyone who purchases shares. The reason is that some people invest in expertly managed setups that spread their investment across various ventures.
However, this is not always the case for everyone. Some people invest in a sole speculative asset. As a result, the value appreciation of that financial asset would be very beneficial. On the other hand, its value stagnation, or worse still, depreciation, would be very costly.
Limited Control
People’s hands may become very tied when they use borrowed consumer loan funds to purchase shares. For example, they may have to sell their shares at certain times. This is even if they feel or even know that there would be a value appreciation along the line.
The need to sort out their debt issue(s) is usually the reason for this. In other words, using a consumer loan to purchase speculative assets leaves investors with very little control over their assets.
Some of the agreed conditions for issuing the loan can even be responsible for this. For example, there is such a thing as margin call. It is an agreed point during the drop in value when the speculative asset would have to be liquidated.
While this sounds like a safety nest, it can be very unfavorable for the investor. The reason is that the volatility of such markets can also mean that the shares would experience value appreciation in the long or even short run.
However, the investor would not have the legal right to call the shot and insist on holding on in such cases. The sale would also not favor the investor in most cases. All this only makes things complicated.
Funding the Purchase of Shares with Credit Lines
The aforementioned section has done justice to discussing why consumer loans should not be used for the purchase of shares. However, how about people who cannot afford to buy these assets with saved-up funds? Should such people turn down the chance to own shares? Are there suitable credit lines for such people?
It is good to know that some credit lines are better suited for this purpose. Although they come with their risks, these risks are nowhere as much as they are with consumer loans. Some of the most suitable credit lines for the purchase of shares include the following:
Securities Financing
Also known as “gearing”, this is better suited for providing the needed funds. For the record, it is a secured credit line, and the collateral happens to be existing funds or even shares.
Usually, you would be allowed to borrow up to amounts worth a significant portion of the funds or shares used as collateral. In a place like Norway for instance, the rate is usually around 85 percent of the worth of the pledged collateral.
Mortgage Refinancing
This is another option which also happens to be a secured credit line. The fact that it is a secured credit line does a lot in reducing the interest that accrues in these kinds of loans.
It entails refinancing one’s mortgage and using it for this purpose. You can visit billigeforbrukslån.no/lån-til-aksjer for more information on how a mortgage refinancing loan works for this purpose. However, it is important to make informed decisions when trading stocks and other speculative assets.
Conclusion
How you invest is as important as what you invest in. It is for reasons such as this that this article has discussed credit lines for the purchase of shares. Be that as it may, knowledge of the market is crucial.
This is regardless of how you choose to fund the purchase. To this end, make sure you make the right moves by learning how the system works and putting such crucial knowledge to work when trading speculative assets.
