The stock market is one of the most lucrative sources of capital for those who consider themselves to be the masters of the game. However, in order to begin making good money in the market, you need some source of initial capital. In addition, even seasoned investors do at times inject more cash to their investment portfolios as they continue to grow their stock holdings.
Did you know that some investors actually take loans to invest money in stocks? Corporate investors do it, too. To illustrate this, I will take you back to a lesson in business finance, which clearly states that the most effective cost of capital is the one that is perfectly weighted with a mixture of debt and equity.
As you may already know, depending on a companys capital mix the cost of equity may actually be higher than the cost of debt? Why is this possible? Debt has other benefits such as being tax deductible. For instance, it is quite clear that Apple (NASDAQ:AAPL), the worlds largest company by market capitalization, has a debt on its books yet it still holds massive cash.
- Warning! GuruFocus has detected 3 Warning Signs with AAPL. Click here to check it out.
- AAPL 15-Year Financial Data
- The intrinsic value of AAPL
- Peter Lynch Chart of AAPL
In fact, Apple enjoys the best operating cash flow margins in the market when compared to other companies of its size. So why does Apple use debt? Technically the company does not need it, but it uses it because it is more cost effective especially when it comes to taxation.
So if a company like Apple finds it more costly to fund its entire capital using equity, shouldnt the same apply to an individual investor? Indeed, it should, especially if you consider yourself to be a serious investor, which means that your involvement in investing in stocks is more like a business rather than a pastime hobby.
However, when it comes to accessing debt, there is the little problem of credit rating, which most lenders use to determine the levels of interest rate to apply to your loan, or worse still, to deny you the loan. If you fall under this category, then it could mean pursuing other means in order to access quick cash that could enable you to invest in that upcoming IPO.
When you look around your home you see a lot of assets that basically experience wear and tear without generating any cash. A smart investor would know how to utilize every opportunity that comes across. Consider a situation where you have an expensive car. You could easily approach a car title loans company to finance a stock investment that you believe would yield better returns in the near future.
Some investors prefer to finance lucrative stock investments by simply dallying with their portfolio of stocks. They identify the ones that are making losses and sell out their positions to finance the new opportunities. However, this sometimes could turn out to be an unwise move because you could keep on closing positions while they are still at a loss, which could eventually have a negative effect on your entire portfolio.
The notion of stock investing is always to buy when the prices are low and sell when they are higher for long-only investors. So if you keep selling out positions that are making losses while investing in new ones, things could end badly.
Yet, instead of dallying with your portfolio at the wrong time, you could always identify one of your valued assets like a car, some expensive jewelry or a piece of land to finance the lucrative investment you are looking to capitalize on.
While financing stock investments with debt may appeal to most investors, it may not be appropriate for others.
For instance, beginners with little experience in the market are likely to find it hard identifying undervalued stocks that have a better chance of delivering good returns. As such, they could end up in more debt or eventually struggle to pay the debt they already owe thereby losing the assets they used to secure the loans.
In addition, it is always good to compare the various loan providers for the best rates. These include those that prefer using your credit score to evaluate the amount and interest you are eligible for, as well as, those that prefer you to provide an asset as a security against the amount borrowed, like a car title or jewelry.
Start a free seven-day trial of Premium Membership to GuruFocus.About the author: