Q. I am 30 years old. My stockbroker friend has advised me to purchase some stocks that were at a very attractive level. As I don’t have enough cash, he has advised me to take a personal loan. Is this even advisable?
We strongly advise investors not to borrow to obtain profits.
Investments in the stock market are typically quite capital-intensive. When you borrow money to invest in shares you would have to regularly service the loan through the payment of monthly instalments (EMIs). As a result, your financial burden would significantly increase and get worse if the shares you purchased end up underperforming.
On the other hand, even if the shares perform in line with your expectations, they still need to make a profit large enough to pay back the interest on the loan. You may not make any profit or could even end up with a loss. This will defeat the very purpose of taking the loan.
If you have enough income to service your loan, you will not need to rely on your stock market investment. Once you invest in stocks, you will need to keep monitoring the market and make changes based on the progress of the companies you have invested in. If you do not have the time and the skill to focus on markets, this strategy may not be feasible.
If you are new to investment, then we suggest you start with mutual funds. Invest systematically (every month or as you receive income) and build a sufficient portfolio. Once you have a basic understanding of the mechanism and dynamics of markets, then and only then should you venture into direct equity investments.
Always take professional help from a financial advisor before taking any investment decisions.
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