Borrowing to invest in shares, sometimes called gearing or leveraged investing.
Funnily enough, a lot of people when they first think about this concept react with fear or skepticism, with the thought about volatile share markets and losing borrowed funds in the backs of their minds.
Borrowing to invest is too risky, you never know what the market is going to do.
Would you do it?
And you could imagine if I suggested a client borrow $500,000 to invest in one stock, say BHP or Telstra. No way. The thing is, we do just that with property.
We borrow all this money, sometimes millions, contribute very little of our own money, and buy a single property. Totally comfortably with no really worry about the risk that we have literally just put all of our eggs in one very large basket.
Reality is borrowing to invest in shares is quite similar to borrowing to invest in property, however you would normally do it as such high levels. The idea is the same.
If you borrow money, you can increase your exposure to an asset, therefore benefiting more from the growth of the asset over the long term.
The good thing about borrowing to invest in shares is that you have a lot of flexibility. You could borrow a lump sum, combine it with your own money and then invest in a diversified share portfolio, but the other option is to build your investment over time.
So you might opt to invest $500 a month of your own money, and at the same time borrow an additional $500 to invest, increasing your investment to $1,000 a month.
There are lots of products that allow you to do this, and this can be a great way to get comfortable with gearing and understanding how it works better before throwing yourself into a large loan.
This is a relatively complex area of investing and I’ve only just touched on it here, but I will say it’s definitely something I think it’s worth seeking advice on if you are thinking about going down that path.
Having a professional explains the ins and outs is a good idea, to be sure you understand everything.