Borrowing to invest, also known as leverage, can be a powerful tool for maximising returns on your investments. However, it’s important to understand the risks involved and to approach leverage with caution. In this blog post, I will explore how to borrow to invest and provide tips for minimising risk.

The first step in borrowing to invest is to understand the different types of borrowing options available. One of the most common ways to borrow to invest is through margin trading. Margin trading allows you to borrow money from a  stockbroker to invest in stocks, bonds and other securities. 

Another option is to take out a personal loan to invest in property or a small business.  You do not necessarily even need to borrow from a bank because you may borrow money privately from relatives, friends and acquaintances.  If you do decide to do this then you may need to appoint a solicitor to put together all of the relevant documentation such as a loan agreement, a personal guarantee etc.  

 

 

Borrowing to invest in property from private lenders is a well-established but not widely known strategy in the UK.  You will need to put together a comprehensive project plan to demonstrate to private lenders that your project has a very high likelihood of success.  Initially, the obvious people to ask to lend to you will be your close relatives, friends, work colleagues and acquaintances.  You should also outline the advantages and disadvantages of lending money to you.  Borrowing money privately is not an FCA-regulated activity nonetheless it is honest and trustworthy of you to be fair, open and not misleading when raising money privately.

 

 

Before deciding to borrow to invest, it’s important to consider your risk tolerance and financial goals. Leverage can amplify both gains and losses, so it’s important to have a solid investment strategy and to be prepared for the possibility of substantial losses.

To minimise risk, it’s also important to diversify your investments. Diversification is key to any investment strategy, but it becomes even more important when using leverage. By spreading your investments across different types of assets, you can reduce the impact of any one investment on your portfolio.

Additionally, it’s important to keep an eye on your leverage level and your margin. The margin is the amount of money you borrow as a percentage of the total value of your investment. For example, if you borrow £10,000 to invest in a stock that’s worth £20,000, your margin is 50%. It’s important to keep your margin level at a reasonable level to avoid overexposure to risk.

It’s also crucial to have a plan for repaying the loan. Before taking out a loan to invest, it’s important to have a clear plan for how you will repay the loan and to ensure that the potential returns from the investment will be sufficient to cover the loan payments and still provide a profit.  So in other words you need to do your due diligence to ensure that borrowing to invest is a sound strategy with a high probability of success.

 

 

In conclusion, borrowing to invest can be a powerful tool for maximising returns, but it’s important to approach leverage with caution. By understanding the different types of borrowing options, considering your risk tolerance and financial goals, diversifying your investments, keeping an eye on your leverage level and margin, and having a plan for repaying the loan, you can minimise risk and maximise returns. 

Remember to always consult with an Independent financial adviser before making any investment decisions.  You know it makes sense.*

 

*Risk warnings

The value of investments can fall as well as rise. You may not get back what you invest. The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction. Prioritise paying off any short-term debt, build an emergency cash fund and consider investing more via your workplace pension. If you make a loss on your investment, you’ll still have to repay the debtAll information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This blog is based purely on my personal opinion and experience.