Should You Take a Loan for Stock Market Investment?

Updated on: 31 Aug 2022 // 5 min read // Personal Loans
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Taking a personal loan for investing in stock market instruments, including stocks, bonds, mutual funds, and derivatives, is purely subjective to the end objectives of an individual, the risk he is willing to undertake, the potential upside of the investment, the chances of return on investment beating the rate of interest levied on the loan and a lot more. 

Simply put, it can be advantageous to many risk-taker investors as they always remain on a perpetual lookout for investment opportunities that can meaningfully maximise their wealth in the least possible time. 
On the contrary, investing through borrowed money can be hazardous for all the conservative market participants as they are the ones who keep their portfolios far away from risky securities and risky bets. Also, such investors don’t willingly over-leverage their financial position for a notch higher return, which remains uncertain.

Is a personal loan bad for you?

Not at all. Personal loans are principally designed to cater to the monetary requirements of underserved individuals who are neither eligible for a credit card nor are in a position to take a loan against property, gold, securities, etc. Being an unsecured credit facility, a personal loan usually has a higher rate of interest as compared to the traditional credit facilities that are either secured by property, gold, securities, etc. 

With the massive growth of the fintech industry, emerging digital players in the banking space, digital lending user interfaces developed by the banks, and increasing penetration of technology, the quantum of money disbursed through personal loans is on the rise. 

The introduction of small-ticket credit facilities has furthered the scope for banks and non-banking financial corporations (NBFCs) as a considerable chunk of salaried people are readily willing to take a small-ticket loan to fund their multiple expenses, it could be purchasing a gadget, going on a vacation, giftings, refinancing or restructuring existing debt, etc.

Also Check: CIBIL score required for personal loan

Who can consider investing in the stock market by taking a loan?

As far as investing through a personal loan is concerned, all the individuals who are really intrigued by the haywire fluctuations and exceptional returns in the stock market should thoroughly understand that borrowing money has its own costs, alongside a slew of terms and conditions. And at the end of the day, you will be obligated to repay the loan, attaching the interest component and applicable tax charges, irrespective of how your investment picks are doing in the market. 

Given the uncertainty and irrational volatility in stock market instruments, even the experts, market veterans, trade pundits, and so-called seasoned investors can go wrong with their bets. There is only a marginal section of investors who have the winning bets, one after the other. 

You will meet the eligibility criteria for a personal loan. If not today, then some other day. Fulfilling the eligibility criteria for a personal loan certainly empowers you with the idea of getting extra funds, but you should not neglect the fact that the money has to be returned. Taking a personal loan without having a proper sight of the repayment plan can seriously jeopardise your personal finances, as a result of which you may end up being in a debt trap by applying for successive loans to repay the former, and so on and so forth. 

Investing through borrowed money can prove to be favourable for the investors who are prepared well enough to reap the additional rewards, as well as who are adequately equipped to absorb unforeseen losses. If you’ve enough assets and receivables to clear off the debt, in case your investments go upside down, then you can consider taking a personal loan for stock market investments. 

Financial products such as personal loans, home loans, or car loans are not bad for consumers. It entirely depends on the way how you are going to utilise them, service them periodically throughout the repayment cycle and make the most out of them by using them for acquiring the assets, products or services that are highly likely to appreciate in the years to come, create value for you, or they are of essential usage.

Benefits of investing through a personal loan

Investing in the stock market by taking a personal loan can be sporadically beneficial for you as with a large amount, you are entitled to purchase a huge quantity of shares, a factor that can put you ahead in the game as you control a sizable portion of outstanding shares. The larger the number of shares, the higher will be the capital gains, higher dividends and multiple chances of encashing a definitive proportion of stock when the share prices are rising. 

Getting a hold of cash can be immensely profitable for you as you can do a lot of bargain hunting, buy undervalued shares, apply for multiple lots in an initial public offering, and try your hand in the derivatives market. Having a sizable balance in your bank account certainly empowers you to purchase shares of good quality and segment-leading corporations at cheap prices and multi-year lows as during bear runs, successive market turmoils and intense crashes.

Drawbacks of taking a personal loan for stock market investment

Alongside a number of benefits, there can be multiple drawbacks and disadvantages of taking a personal loan for stock market investments. It can outrightly backfire on you and put you in a situation where you either have to encash your emergency and retirement funds or have to apply for another loan to service the EMIs of the former. 
You may find it very difficult to navigate through a situation if your bets go wrong and you have not provisioned for such an unanticipated move when the investment portfolio has turned negative and the interest rate charges on a personal loan have risen in recent quarters. It could be a double whammy for any investor. 

Investing borrowed money without thoughtful due diligence can land you in serious trouble as nobody is 100% sure about the direction of market prices of a stock market instrument or the headline index. You can always work on projections. The only thing that matters is how your estimations can turn out to be true. 

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