Dumb to Borrow Money to Buy Stocks

Submitted by Stock Market News on 9 May, 2011 - 17:02

Why you should not borrow money to trade.

All of us has to start somewhere. Unfortunately that somewhere isn't always a good place to start. When it comes to trading, most often than not, newbies are lured by the prospect of earning millions without realising how much hard work is needed for it to happen. Apart from that, you will need a considerable amount of capital to begin with. Don't expect to make big gains out of small wagers, especially in the stock market.

One of the options that you can choose to fund your early retirement is to borrow money. You can borrow from a bank via a margin loan or from your parents. But before you get excited, getting money is not the only thing you need to profit from the stock market.

It's Not Smart to Borrow Money To Trade Shares

You are truly dumb to borrow money if:

  • You don't have a back up plan to settle your debt when you get burned from share trading. Trading with money that you can't lose makes you desperate, this will in turn lead you to over trade (trading even when the probabilities are low), and easily influence your decisions.
  • You don't have a consistent profitable trading plan. Sure you can't predict how the market will act, but you can create a plan that will enable you to make the best out of every opportunity you get and cut your losses when there's none. Investing on speculative stocks with borrowed money is a potential disaster.
  • You jump in blindly without considering the inherent risks. Unless that money is given to you for free, you have interests to deal with. On top of that there are also other costs such as commissions, and losing trades.
  • You don't consider your financial status. If you're going to depend solely on trading then your bound to lose. Relying on an inconsistent source of income for your living expenses with borrowed money is just plain stupid.

To make money out of the stock market you have to stop treating it as gambling. Profitability requires structure and calculated risks. Be patient enough to trade on a demo account and unless you are able to double your earnings, its best to save up first.

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