When Is A Good Time To Borrow Against Stocks

Navigating the Risks and Rewards of Borrowing Against Stocks

Borrowing against the stocks in your portfolio comes with inherent risks, just as any financial maneuver might. But it is important to understand the nature of the risk involved and how it might differ from taking out a regular loan from the bank. By understanding these risks, investors can make informed decisions about whether or not borrowing against their stocks is right for them.

Understanding the Nature of Risk

The first thing to keep in mind is that, when you borrow against the value of stocks, you are not just using those stocks as collateral. Rather, they represent your financial standing and help determine what the lender is willing to give you. It may seem like collateral, because if you cannot pay your loan, you can always sell those securities to make the payment. This is assuming, of course, that your stocks have not depreciated in value. When you borrow against stocks, you are borrowing against something that may not be there for you later on.

The Compounded Risks of Financial Decisions

Second, it is important to keep in mind that even when making sound financial decisions with loans, the risks are compounded if something goes wrong. For example, many people take out lines of credit based on their current stocks so they can purchase more shares. If their stock goes up, then they pay back the loan at the original rate and their gains are significantly larger than they would have been without the loan. But should their stock depreciate in value, they not only lose money, but are now stuck paying back a loan they can no longer afford. Understanding these potential risks and rewards will allow you to make an informed decision about borrowing against your stocks.

Timing and Considerations

A good time to borrow against stocks is when your finances require it and you locate a reputable stock lender. Today interest rates on stock loans can be in the 3-4% range but the stocks often appreciate at double digits, making the stock loan a sensible option.