Can I Borrow Money for Stock Trading?
From a bank, no. But there are alternate ways to obtain funds for investing in stocks.
You may hear from time to time that banks do not loan money for stock trading. That may be, but it doesn’t mean you can’t borrow money to invest in the stock market.
Once you get enough experience and education, your friends and family may want you to invest their money to help their financial situation. They may just loan you money to help you get ahead.
If you’re like many of us and you’re not overly enthusiastic about being responsible for Grandma’s retirement funds, there are other options.
Like the real estate market, the stock market allows ample opportunity to use Other People’s Money (OPM). As a stock investor, you can take advantage of something that is called a margin account.
Buying stock on margin allows you to leverage your money in a way that’s little different than how a real estate investor would use a bank loan.
Rich Dad philosophy is to use debt once you have become educated, not before. Leveraging money with good debt is something that should be respected rather than something that should be feared. The debt that people should fear is debt that must be paid off by working at a job.
What is a Margin Account?
Buying on margin is borrowing money from a broker to purchase stock. Instead of getting a loan from your bank, you are getting a loan from your broker. Leveraging margins allows you to buy more stock than you'd be able to normally. This allows you to make more money and trade in greater volume. This also allows you to lose more money for the same reasons.
Remember, debt is not to be used lightly. It demands great respect and education.
To trade on margin, you need a margin account with your broker and you need collateral. Collateral is usually in the form of existing stocks you’ve already purchased. As with just about any loan, these are not free. Your broker will charge an interest rate. So if you are buying stocks for the long term, make sure the gains will cover the cost of extended interest rates.
Once the account is opened and operational, you can borrow up to 50% of the purchase price of a stock.
Why use margin? The same reason real estate investors use debt: leverage. Leverage amplifies every point that a stock goes up. If you pick the right investment, margin can dramatically increase your profit. Pick the wrong one and it can dramatically increase your losses too.
Leverage is the fastest way to build wealth, but it is also the most dangerous. We often say debt is a lot like a loaded gun. If you use it without training and education, terrible things can happen. If you use it correctly and with your education, it can be a great tool.
If you’d like to understand margin trading further, Investopedia has a very clear tutorial: http://www.investopedia.com/university/margin/