# Raising Capital



## The Estimator (14 October 2005)

Hey Guys,

I've been looking at getting a personal loan to get some capital together.  I went with NAB due to their interest rate and being an existing member.  Well I just got off the phone to them.  Initially I was only looking for 40K.  The girl said that this type of loan is issued as a cheque.  Because I want to do my trading online she tells me I need a loan that is issued as cash.  She said if I was to trade through a broker then I could use the "cheque" loan.  As a result I would have to go for a "project loan".  The maximum of the project loan is 35K. Due to the higher interest rate, shorter loan period (5 years) and no option for weekly repayments I would be paying 20% more per month on the project loan of 35K as opposed to the equivalent 40K personal loan.

Sorry for the spiel but I was wondering what everyone else does when borrowing to invest in shares?  Do you guys all use brokers?  If I did do it through a broker obviously my brokerage fees would be more but could I still trade online?

Any suggestions would be helpful.  I'm having trouble coming at paying 20% more a month for 5K less capital.

John


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## tech/a (14 October 2005)

I personally use line of credits.

Why not take the loan in cash then simply place it in your trading account?

I've been trading short term discretionary for the last few Months---and as I normally trade longer term---my full service broker is going to be able to retire this month!!

I have to open an on line account.
I'll keep the full service broker for the longterm margin portfolio/s.

So in short 
Short term use an online broker.
Longterm not as important and over 10K trades there is little difference in fees.---well to me anyway.

Are you going to trade straight or margin.
If margin then your 40K will leverage to around 100K.
Margin calls are great stops and if called you would know that whatever your doing aint working!

Goodluck---gutsy move if you havent got the numbers but I'm sure you know what your doing and have quantified the risk.

If not then do!


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## money tree (14 October 2005)

borrowing to trade is the dumbest idea under the sun

the golden rule is:

DO NOT RISK ANY CAPITAL YOU CANT AFFORD TO LOSE (especially if it aint yours)

if you want to borrow to INVEST, look at instalment warrants.

ps. now is the worst possible time to invest in shares


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## The Estimator (14 October 2005)

Thanks for the response guys.

Tech/A

The whole "just get the loan in cash and put it in your trading account" is the problem.  The only type I can see that can be issued as cash is the project loan which costs a lot more for a fair amount less in capital.  I might try some of the other lenders out and see what they say regarding crediting a trading account with a  personal loan.

Money Tree

The way I have looked at it is this.  I could spend the next few years paying a car loan off or I could spend it paying an investment off.  Whats the difference?  I've factored to pay the repayments out of my own pocket.  I haven't allowed for any income from the investment to pay the loan off.  Worst case scenario is I do the dough and continue to pay off the intitial amount as I had always planned.  Best case scenario my investment grows.  If I get a car loan instead I pay the repayments, the rego, the insurance, the running costs and then in 3-4 years time I sell it for a 20-50% loss.  

Ideally I'd like to buy property but then I'm starting to look at large sums of money hanging over my head and I dont think theres much room for substantial growth over the next couple of years.

How did you raise your intitial capital for trading?  I dont have any other source.  I could always put the $800 I'd be putting into repayments straight into the market (which I have been) but then I have to make 10% a trade before I even break even with brokerage.  It just doesnt seem an effective way to invest.  I can tell you I cant see any rellies keeling over any time soon and leaving me their Murcielago and beach side condo.

Anyway guys, this is good.  Keep the suggestions (or criticisms) coming.

John


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## Smurf1976 (14 October 2005)

In my opinion you should PROVE that you have a profitable basis (method / system) for trading stocks BEFORE you borrow any money.

That is, design and back test a system and prove that (1) it makes a reasonable profit over time and (2) that at no point does it have a drawdown that would cause the loss of most or all of your borrowed money (because if that happens then you're out of the game so future profit potential is irrelevant). Don't forget to include brokerage in your calculations.

Personally I like to take "worst case" assumptions when buying and selling for testing purposes. I always assume that I bought at the highest price on that day and sold at the lowest. Actual results should be a little better but this seems a reasonable "acid test" IMO.

Don't just look at the account balance at the end. Note what happens in terms of flat periods where not much is happening, slumps, sudden bursts of profits and so on. Make sure you understand what should be happening "Ã¯n the real world" both in terms of the actual trading and your account balance.

HAVE THIS SYSTEM WRITTEN DOWN or otherwise recorded and stick to it.

Next thing to do is paper trade the system. Notionally buy and sell shares "on paper" and check that all goes as your testing suggests it ought to. Strictly adhere to the rules of your system. This is harder than it sounds.

Once you have proven that you can make money in the market, THEN go to the bank and borrow the money and start trading your system "live" with real money and buying and selling real stocks. But be sure to do it EXACTLY as you did when testing and keep an eye on the results. Stop if something is going wrong beyond the limits that your testing found to be normal.

This is not advice, just my opinion. Be sure to check, check and check again because your money is YOUR responsibility.


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## tech/a (15 October 2005)

money tree said:
			
		

> borrowing to trade is the dumbest idea under the sun
> 
> the golden rule is:
> 
> ...




Tree thats simply a singular broad statement.
You could say the same about buying ANY BUSINESS.
People borrow huge sums for business investment.
If you and anyone else doesnt see trading as a business then your asking for failure.
Your insinuating that trading is gambling---DO NOT RISK CAPITAL YOU CANT AFFORD TO LOSE---.
Every time you use a credit card once spent you have no other way of replenishing other than by earnings.
With a well planned tested and implemented trading methodology at least you have a chance at earning against those borrowings.


*Due diligence---yes*--Investment Warrents--one way to run a business.
Share portfolio another.

*ps. now is the worst possible time to invest in shares*

"In your opinion"
Challenging yes---worst--I'll tell you next year.


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## kaveman (15 October 2005)

I think this would possibly be a very good time to be investing. The market is showing signs of a good sized pull back. 
Why not think in long term and "average in" over a period of time. eg if you want to invest $10k in each stock, split this into 4 lots and invest each part over 4 months, or even over 8-12 months. You never know when the market will turn up, so measure out your entries. You are possibly planning to hold the stock for years anyway so entering slowly could help
Just some thoughts, I am not a licenced financial adivsor or licenced anything else for that matter.


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## krisbarry (15 October 2005)

I think a combination of your own money and the banks money is a great idea.

I use lines of credit and my fortnightly pays to keep me trading.

My lines of credit are low interest/fee free credit cards.  I am sure some people will give me some stick on the credit card front.

But the way I see it is that the interest charged comes straight of my taxable income, so the interest rates in real terms is very low.

Also the flexibility of using credit cards seems to be a great option, I can trade using them, then pay them off within days of a trade too.  I can also choose my own stocks, the level of risk etc. and I am not goverened by rules and regulations, except for the card issuers rules etc. As long as I pay the miniumum monthly payments then I can continue to use extra leverage to extract a little more money out of trades.

There is also the option of using margin lending, but this also inhibts the kinds of trades that can be performed, and the types of stocks you can trade on.

The other option is to take out a low interest personal loan.  You will most likely need to lie about the purpose of the loan, as most personal loans are to be used for personal products like cars, boats, furniture etc.  My sister did this, she borrowed money from one bank to invest in shares in another bank, made profit, then paid off the loan.

So many options, I guess its up to you, the level of risk you are prepared to take, the flexibility of trading, rules/laws, trading styles etc.


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## Smurf1976 (15 October 2005)

One point that is important IMO is not to let the "stress" of owing money change the way that you trade.

Trading under pressure where this next trade "must" be a winner tends to lead to losses IMO so keep the amount of debt sensible so you're not stressed about it.


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## The Estimator (15 October 2005)

krisbarry said:
			
		

> My sister did this, she borrowed money from one bank to invest in shares in another bank, made profit, then paid off the loan.




This is what I'm trying to do Kris.  The problem is that the National claimed they can only issue personal loans as cheques so the only way to use it for share trading is if I nominate a broker to which the cheque would be forwarded.  They wont just credit it to my existing trading account.  How did your sister get around this?  I might try calling the other banks on Monday.  See if they would issue it to my trading account.

I was thinking last night I could use a broker for my first lot of trades then pull the money out as they run their course and put it into my online trading account.  I'd only have to put up for the higher brokerage for the first lot of trades that way.

Thanks for all the responses guys.  It's much appreciated.

John


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## tech/a (15 October 2005)

John

After re reading the context of this thread.

You must consider the possibility that you'll lose the lot and owe the full amount.
What your doing without collateral is very risky.
I did this initially in business.
*Without the collateral*---and I will to some extent support Moneytree here,there is NO WAY I'd do what your doing particularly without a track record.

I dont know your situation but from what I gather you dont have collateral and the loan is unsecured.

A poor plan here could set you back many years and turn you off trading forever.


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## It's Snake Pliskin (15 October 2005)

I support a lot of the above comments and agree that borrowing to invest/trade is not what I would be doing. 

Save like a tight arse scoundral and then use that money after you have studied your arse off. Stop smoking, buying videos, cds, having expensive lunches, treating women to whatever you treat them to, get a low maintenance woman and you will benefit and then have money to trade with. 

Generally young people spend money in ridiculous amounts on things they don't need and can't afford. Don't let this be you! You can do it. After a few months you'll have the money and can start trading. BXP will make you quick money even if a small amount is traded. And if you trade a little on it you won't be risking much anyway. Find such a stock and then your money is working already. Beautiful isn't it.

Do your own research though and I'm not ramping BXP. Just some thoughts for you.


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## Smurf1976 (15 October 2005)

tech/a said:
			
		

> John
> 
> After re reading the context of this thread.
> 
> ...



Agreed there tech. This has the potential to go very badly wrong.

Would make more sense IMO to:

1. Save as if you were repaying a loan.
2. Design and prove (back test) a trading system.
3. Paper trade that system for a reasonable period to prove that it works.
4. Then take your own money that has been saved, and it should be quite a bit by this time, and use that for trading. Forget the loan.


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## ob1kenobi (15 October 2005)

I think a combination of your own money and the banks money is a great idea.



			
				krisbarry said:
			
		

> I use lines of credit and my fortnightly pays to keep me trading.
> 
> My lines of credit are low interest/fee free credit cards. I am sure some people will give me some stick on the credit card front.
> 
> ...




I have used the same method, low rate Credit Card (ANZ @ 11.75%) and my fortnightly pay. In my Trading Plan (which is written down and regularly revised), I state that I will not exceed a 40% Debt : 60% Equity ratio. In other words, the most I will take from a Credit Card would consitute no more than 40% of my portfolio. The downside is that you're not working with large sums of money at once, the upside is it gives you a lot of control over the investment, repayment etc. I run things as a business, so I stick to my Trading Plan. It is all recorded through my accounting records, which I update weekly. Affordability is the key. If you can't afford, don't do it. If you're not prepared to suffer a loss, don't do it. 

Before borrowing from NAB on a personal loan, I would research other institutions and explore the idea of installment warrants. At the end of the day, it is your money! Good luck!


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## bvbfan (15 October 2005)

Why are you guys using credit cards at 11%+?
Plus all the cash advance fees?

You do know there are unsecured personal loans from about 9%
I have one at 9.25% with no other fees and redraw facility


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## krisbarry (16 October 2005)

The Estimator said:
			
		

> This is what I'm trying to do Kris.  The problem is that the National claimed they can only issue personal loans as cheques so the only way to use it for share trading is if I nominate a broker to which the cheque would be forwarded.  They wont just credit it to my existing trading account.  How did your sister get around this?  I might try calling the other banks on Monday.  See if they would issue it to my trading account.




Yeah, she used a broker at the time.  Try other banks as they may be more flexible.


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## Stan 101 (16 October 2005)

Snake Pliskin said:
			
		

> get a low maintenance woman




sorry for the off topic, but Snake, can you tell me where to find said woman?


As for the bank, you might like to call the NAB and ask to speak in person with a Personal Banker. Sit down with them and show them your plan. Have a plan to show them, give some projections and the types of shares you will buy. Show them in spreadsheet form your "dry" trading.

Or as you said, get a personal loan as cheque to a broker, let them cash it, buy your shares, then get them transfered over to your online banking.

Please be sure of your system as the others have mentioned and here's to good buying.

Cheers,


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## The Estimator (17 October 2005)

Thanks for the response guys.  You've scared me enough that I might hold off for a little bit but not too long.  I downloaded the trial version of AB.  Once I work it out I'll do some backtesting.  As far as the loan goes I was planning on trading a variant of Rozella's dividend strategy.  It would be good to have AB ayway because I'm constantly coming up with ideas I'd like to test out but dont really have the tools to carry through effectively.



			
				bvbfan said:
			
		

> You do know there are unsecured personal loans from about 9%




What lender is this with.  I take it this is a fixed rate loan you have had for a while?  None of the lenders I looked at had interest rates under 11%

Cheers

John


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## bvbfan (17 October 2005)

No it's variable, its with EasyStreet (the online arm of Community First Credit Union)
I've had it since end of last year I think (was 9% when I started)


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## tech/a (18 October 2005)

E.

Did you say you had no collateral at all?
No home?

I was just thinking that if you did or if others were interested I would *start a thread on releasing the equity in your home/s*---which is what I have done.

Personally I think one of the greatest tradgedies of wealth creation is the stagnation of equity in houses.
If you have $100K in increased value in a home and do nothing with it its like having $100K cash in the bank earning no interest.

Many wonder how to go about this ---at least I can tell my own story which may help others concoct their own equity use.


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## RodC (18 October 2005)

Hi tech,

I'd be interested in seeing a a thread on releasing equity. I used equity in our home to get started in property investing, but have always used cash (and margin loans) for shares.

I'd like to see your ideas to get another perspective, because I may well have overlooked something.

Rod.


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## kaveman (18 October 2005)

> If you have $100K in increased value in a home and do nothing with it its like having $100K cash in the bank earning no interest."




Not exactly true, it is invested in your bricks and mortar. These have been quite healthy returns of recent years. I have moved house a few times over the years upsizing as I could afford it. My last move I had to go slightly cheaper and live a bit further from city, but I am now mortgage free at a time when my income has dropped by 50%. In less than 3 years since buyiing, the value of this house has gone up almost 50%.


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## tech/a (18 October 2005)

kaveman said:
			
		

> Not exactly true, it is invested in your bricks and mortar. These have been quite healthy returns of recent years. I have moved house a few times over the years upsizing as I could afford it. My last move I had to go slightly cheaper and live a bit further from city, but I am now mortgage free at a time when my income has dropped by 50%. In less than 3 years since buyiing, the value of this house has gone up almost 50%.





Kave.

There is a difference.

In your case youre using the equity to improve the home type you live in---youre actually using the equity.
In the case I am highlighting people stay put and feel comfortable that their 
$100K home they bought 5 yrs ago is now worth $250K.

There is 150K locked in their home that they cant have unless they sell for $250k and replace it with another $100K dwelling.
They would then have nett $150K 

To be able to stay in your home and release the $150K or so to use in your quest for a better lifestyle and or retirement can be powerful---as you well know!

Yours is one way and very valid.
Question is do you sit back freehold and be happy with that?
If yes then fine.
If no then you have a powerful asset.


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## The Estimator (18 October 2005)

Tech,

No house, I'm only a young guy a year out of uni.  I worked through uni but the money went straight back into uni and uni "life".  So zero collateral.  I have a couple of cars but they are both more of a liability than an asset.  The equity thread does sound like a great idea though.  I was thinking when I started this thread it would be good if there were a few more threads on methods of capital raising.  Its all well and good to have the skills to be a successful trader but without maximising trading capital your wasting time and money.

Cheers

John


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## mime (18 October 2005)

I wouldn't recomend borrowing to trade stocks unless you are very skilled. Remember that although the rewards are more. Losses can be very heavy.


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## tech/a (18 October 2005)

Mime

That is true.
But then borrowing for any financial venture could also be seen as very risky.
We know 95% of small businesses go broke.
We also know that many of those have borrowed and there would be many who havent/or didnt and died as they were undercapitalised.
How many people who borrow money for anything understand Risk/Reward?
How many would not enter into their venture if they did?
How many would have survived their disaster and continued in profit had they been fully versed?

This is a great topic and one I havent seen discussed in any detail anywhere.


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## money tree (18 October 2005)

what is the motivation for borrowing? 

is greed suggesting you are 'missing out' by saving up?

if you were a good trader to begin with, wouldnt you already have capital to trade?

or are you falling into the "if I had more money I could trade better" trap?


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## money tree (18 October 2005)

tech/a said:
			
		

> Your insinuating that trading is gambling




I dont need to insinuate anything. The stats prove it. 

97% of traders go broke. 

The casino's house edge is 3%. 

Coincidence?

SOME people can trade. 97% cant (and are therefore gambling)

On the other hand, 85% of INVESTORS make money (due to long term markets rising)

The biggest favour you or I can do for budding traders is NOT to encourage them, but to show them the truth, and that is that trading is extremely hard, with very low odds of success. It is not like plucking 50's from a tree as some pretend.


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## Milk Man (18 October 2005)

money tree said:
			
		

> The biggest favour you or I can do for budding traders is NOT to encourage them, but to show them the truth, and that is that trading is extremely hard, with very low odds of success. *It is not like plucking 50's from a tree as some pretend*.




Who would pretend such things *Money Tree? : *


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## Smurf1976 (18 October 2005)

There is also a very significant non-economic value, that of security, in owning your home outright with no debts.


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## tech/a (18 October 2005)

money tree said:
			
		

> what is the motivation for borrowing?
> 
> is greed suggesting you are 'missing out' by saving up?
> 
> ...





Motivation leverage or it could simply be initial start up capital---many do it for small business why not this small business???.



			
				money tree said:
			
		

> I dont need to insinuate anything. The stats prove it.
> 
> 97% of traders go broke.
> 
> ...





*Tree* Thats not tradings fault its the WAY people trade that causes the statistics and ofcourse takes the shape of gambling.
I do agree that 95% of those 97% failures will be short term traders.
Most will ofcourse be under capitalised and as such make poor decisions.
I really dont think you can tar all traders with one brush and I dont think the way to help traders is to place the FEAR of ruin on a placard over their beds either.

Why dont you and others in the Financial Planning fraternity teach risk management?Why arent you posting here wads of information on money management on ways to mitigate risk and avoid being one of those statistics.

It seems your way of handling it from the post above is to simply discuss worst outcomes not proactive SOLUTIONS.

Is it that the Financial planning fraternity dont have the answers to the most basic of what I would consider BASIC and MANDATORY Financial advice.
Ist it the goal of advisors to make their clients money work for them and as such gain more clients through recommendation?

I see risk disclosure after risk discloure on EVERY financial product I've ever laid eyes on---ways to minimise risk---are just not known.

I asked a few friends of mine who are planners how to minimise my risk when trading------they had and have *ABSOLUTLEY NO IDEA!!!!*

Do you really suggest we just discuss how you can be ruined.

Is there no hope of being a successful trader? Is the exercise pointless?

What are the alternatives for those who wish to create REAL wealth using $100s of K---options? Instalment warrents?Cash in the bank?Super?

My view is that if you dont take care of your own financial freedom NO ONE ELSE WILL-----because they are trying to do the same as you and if they had the answer they would be doing it.


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## tech/a (18 October 2005)

Smurf1976 said:
			
		

> There is also a very significant non-economic value, that of security, in owning your home outright with no debts.





True but is that enough at 55,65,75??

What is enough?
Owning your own home and a pension is pretty basic living---try paying the rates,water,electricity,gas,phone,food,petrol.

Burying your head in the sand of contentment doesnt give you the security a lifes work deserves.
Only you can determine who's making who the coffee!!!
(Financial ad on TV).


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## Smurf1976 (18 October 2005)

tech/a said:
			
		

> True but is that enough at 55,65,75??
> 
> What is enough?
> Owning your own home and a pension is pretty basic living---try paying the rates,water,electricity,gas,phone,food,petrol.
> ...



Agreed there tech but there is a need for balance. If I was worth, say, $10 million then there's no way that I would have mortgage on my house just to get an extra 300K (literally 3%) for trading with. At that level IMO the security value of the house becomes more important than a small increase in profit.

Of course if it's a matter of 50K for trading versus 350K if you mortgage the house then that is a different situation. But if the trading makes a decent profit then I think that most people in due course would feel far happier with the loan repaid and just keep trading using their own funds as capital (which would be pretty large by now if the trading has been profitable).


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## The Estimator (18 October 2005)

money tree said:
			
		

> what is the motivation for borrowing?
> 
> is greed suggesting you are 'missing out' by saving up?
> 
> ...




Am I missing something?  Did all of the successful traders in here wake up with a pot of gold next to their bed? If I was a good trader wouldn't I already have capital?  Even if I made 500% profit, 500% of zero is zero. Also how many of the 95% of failed traders perused online forums such as this asking for oppinions and studying others systems.  Maybe I just fit into the greed category. This is the way I see it.  I can put $750 into the market every month.  With brokerage that means I need to make close to 10% before breaking even.  If you had to make 10% before breaking even on your trades how profitable would you be.  True maybe I should lay off for a while and learn the game a bit better.  At what point am I classed as "experienced" enough to raise some capital?  Or I could just sit on the $750 a month for two years.  That will be productive.  I really do appreciate the responses guys, even the negative stuff.  I just don't feel any smarter reading posts like above.  This all came about because I was thinking of getting a car loan and decided why not put the money into a real investment instead.  I'm starting to think the car might be the better option.  At least then I'll KNOW I'm going to lose the money.

Thanks to Tech and the rest of the boys for their rational responses.

John


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## kaveman (18 October 2005)

I would hazard a guess that most started small, even as long term investors. Trading seems to be one step on from this buy/hold method. 
With a small amount of available cash i would look at starting a longer term view to trading, but then I have already made my point on this here before.

Trading seems easy, and maybe for some it is, but most would find that it takes a long time to learn, most importantly learning what suits you. 

Treat trading like any profession and learn before you put your money on the line. There is no great rush as the market should still be here for years to come, and if it is not here just think of the money you saved by not being there if they pull the plug.


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## mit (19 October 2005)

money tree said:
			
		

> what is the motivation for borrowing?
> 
> is greed suggesting you are 'missing out' by saving up?
> 
> ...




MT,

It depends. You trade options which are leveraged instruments. Futures are another leveraged instrument as are CFDs. Borrowing for shares or using margin is just another way of getting leverage. You may have 40k to trade options another person might have 40k and borrow 60k to trade shares.

If you started with 5k and successfully doubled you money each year you would have 20k after 2 years. Good trading but hardly world shattering (oops forgot tax it would be about 12k). If your system has positive expectancy why not borrow.

Personally, If I started again I would start  with CFDs and if I wanted to stay with equities I would move to margin lending

MIT


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