The most common view regarding the use of a loan is likely to be that of financing any more or less necessary acquisition. For example, a new car or even a house built, then the credit is the most frequently used type of financing. This is confirmed on a regular basis by numerous statistics and surveys of relevant specialist magazines. But with a loan, it is not just a car or even a house that can be financed. So powerful consumer uses low interest rates, as they are currently taking place, also for a kind of financing, which seems quite absurd to many people: for wealth formation! What do you mean, debt to build a fortune? How is that supposed to work?
The magic word is called Securities Credit
Admittedly, it sounds paradoxical and subjective, it seems completely nonsense, namely to buy securities “on Pump”. But as paradoxical as it may sound, such a project can indeed work in practice. Who are a few rules to remember regarding such a project, can achieve a credit-financed investment in securities in the total return. For this purpose, various banks and brokers offer special securities loans, which are precisely oriented to this financing variant and the purpose of use. In practice, securities lending almost always works in such a way that one as a customer already has or wants to buy securities, which then act as collateral for the loan amount up to a certain loan value.
Securities lending in practice
The following example shows how such a securities loan could be presented in practice: for example, if you as a customer of a broker have Securities in the equivalent of $50,000 in the custody account or would like to purchase them, the Bank determines a loan-to-value of 80 percent. This would enable the depositary bank to receive a total of $40,000 as a security loan. It is of course important to bear in mind that, of course, interest will also be payable in the case of a securities loan, which is of course subject to information. For these interest rates play a significant role in the calculation of returns. Moreover, the securities loan is repaid as a normal instalment loan, i.e. in monthly instalments up to the end of the agreed term.
Taking into account the risks associated with securities lending
Every Investment is subject to certain risks, which one should always be aware of. This risk is increased by the inclusion of a securities credit. Although the primary objective of achieving a positive return through the loan-financed Investment is not unrealistic. However, a loss of the investment can also occur at any time. For first of all, as a borrower, you make debts by taking up the loan. If the loan-financed Investment fails, you still have to pay off that loan. In addition to the loss of the investment a significant financial burden!
If you are thinking of financing an Investment through a loan, you should be aware that you are doing a high-risk business. Basically, it is more likely to be discouraged from financing securities purchases through a credit. While this can work in practice, on the one hand, there is no guarantee of investment success and on the other hand, the risk of losses being incurred is not negligible.