Hari Khatri
"Be careful playing with fire. You may end up cooking a meal or burning a house."
Are you investing in credit? Did you prepare for the risks associated with it? Can you handle your day-to-day activities if your prediction turns sour?
Borrowed money to invest in stocks is called leverage or simply investing on margin or loan. Personally, I am not in the favor of investing in loans and I highly recommend retail investors to invest with their own savings only.
In the market, if the right equities are chosen at the right time and at the right price, it may result in multi-bagger returns in a period of time. So, if invested by taking a loan, one may get a higher profit on the same percentage gain of stocks. But, if equities and the market cannot perform according to the prediction, investing on margin may take away a huge chunk of your wealth, some of which you were expected to pay back to your lender.
So, here are some tips if you are investing in loans:
i. Investing in stocks whose dividend yield is more than the interest rate.
ii. Investing at the end of a bear run or at the beginning of a bull run of the market so that there is a strong possibility to find undervalued equities.
iii. Investing in stocks with strong fundamentals and great dividend history.
iv. Invest in stocks that have a higher potential for future growth.
v. Invest for the midterm or long term i.e. avoid short-term speculation.
vi. Diversify your portfolio so that the loss of one can be nullified from other equities.
vii. Don’t invest all of your money at once.
viii. Allocate first, second installments or interests of loan separately so that if the market crashes, you can survive and can hold up to the recovery of the market.
ix. Know your limits and maintain a fixed income source for your basic needs.
There are numerous success stories of people who have earned by investing in loans, as much as there are failure stories of speculation failures. In-depth knowledge of market scenario, cycle, and multiple factors of the market as well as experience is a must to succeed in it. One has to be up to date about the history, recent changes, trends, news, and announcements and has to analyze the risks and rewards thoroughly.
The stock market is a very volatile market and you cannot predict it with 100% accuracy. So, You can wipe out all your capital in a short span of time too, as much as you can grow your portfolio by multiple folds. Investing in credit creates fear, stress, and raises the possibility of panic-selling or revenge-buying. A bad run in the stock market may create problems in personal, family, and social life if the loan amount is too significant.
Like I already said, investing in credit is like playing with fire. If it is in your control, you can use it as fuel. If mishandled, a spark can burn an entire village down.
Article by Hari Khatri
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