DianaR

A friend of mine did something that I think is more than a little risky.

He took out a personal loan to invest in a stock that he fell in love with. I have no clue how he developed the obsession but he is very proud of himself.

Is this something that is generally accepted as a wise decision? I have no clue what return he expects to see, but the payments on the loan will be about $200.00 per month!

Am I just being too cautious, or does this sound crazy to you as well?

Rabscuttle

You're kidding? Will the stock appreciate better then the loan interest rate (taking capital gains into account)? Is the company making so much, that if he holds onto the stock, the dividends will match the interest rate? Sounds like a crazy move to me. Why not just take that $200/mo and set IT aside and then invent it when the right opportunity comes along?

DianaR

I thought so!

Unless he can double his money in the next 3 weeks, he might as well be throwing all of it on a roulette table!

crassus

Did your friend take the time to weigh the possible gain/loss factors? Where did the information come from that said the pick was such a winner?

DianaR

This is something his father, of all people, convinced him to do. Seems that, if it was such a good idea, dad should have loaned the money instead of a lender being used.

I have no clue why the dad thought this investment was a good bet.

StockHunter

Taking a loan out to invest should be treated just like taking a loan out to start a business. Trading and investing are just like running your own business, and you will do alot better if you approach it with that mindset.

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Hunt for the daytrade
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Raven

Banks do offer loans using stocks/shares as security. They're called margin loans - and quite a lot of day-traders have these.

Problem is - your friend isn't a day-trader. He's just sitting on a stock that his dad liked and paying interest on a personal loan.

StockHunter is right - it's like running a business.

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DianaR

That is a good point. I have no clue what sort of research was done before he decided to take the plunge.

Would you create something akin to a business plan if this were to be more than just a one time venture?

StockHunter

Yes.

Rember he is using the money for work, so somewhere in that plan he should have an expected time to payoff the debt/start making payments with the money earned.

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Hunt for the daytrade
"It's not about the timeframe you are trading. It's the strategy, and rules you use."

puchchu

Business is risk but this type of risk sounds unbeliveable.

DianaR

Well, so far he hasn't done a business plan and, I bet, if he does one now he won't be able to claim any of the expenses associated with the loan he is using for investment purposes.


Of course, there is nothing preventing him from registering himself as a company and using subsequent expenses as business write offs.

I just think he's too lazy to pull take the steps he should to protect himself.

StockHunter

Use caution if he registers himself as a company. Because if he does it wrong he may end of paying "professional" level fees (i.e. my data provider charges more then dubble for pros vs. reg guys like me, and some features from his broker will costs more, etc.). Shouldn't be that big of a worry, but you can end up making a mistake if you don't do it right.

__________________
Hunt for the daytrade
"It's not about the timeframe you are trading. It's the strategy, and rules you use."

DianaR

Where would he look to find out how to do it the right way?

I didn't know there were huge difference in the price of doing business!

Any good books?

StockHunter

Sorry, but I don't have any books/sites for info. I would search the net on what a "pro trader/investor" is, and just make sure he doesn't meet any on the requirements to be a "pro trader/investor". Again i'm sorry for not being much help with this particular thing.

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Hunt for the daytrade
"It's not about the timeframe you are trading. It's the strategy, and rules you use."

Ray The Money Man

You would be surprised how many "beginner investors" borrow money to invest. And it is usually in Penny Stocks. Simple math will tell you it is risky business.

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