Raising Capital

[The Estimator]

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

 

[tech/a]

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!

 

[money tree]

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

 

[The Estimator]

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

 

[Smurf1976]

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 "ïn 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.

 

[tech/a]

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

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.

 

[kaveman]

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.

 

[krisbarry]

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.

 

[Smurf1976]

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.

 

[The Estimator]

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

 

[tech/a]

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.

 

[It's Snake Pliskin]

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.

 

[Smurf1976]

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.

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.

 

[ob1kenobi]

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.

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!

 

[bvbfan]

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

 

[krisbarry]

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.

 

[Stan 101]

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,

 

[The Estimator]

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.

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

 

[bvbfan]

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)

 

[tech/a]

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.