What has always surprised me in my life as a stockbroker are certain tenets of faith that are prayed down over and over again, and are also rigorously observed by many investors. One of these principles is: Never invest on credit!
But why not? Because with borrowed money one can extend its room for maneuver nevertheless considerably. However, I must clarify one thing at this point. This article is not about normal installment loans that you take out for consumption purposes, but today we deal with the so-called securities loan.
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And this is how it works
The securities loan can be a very helpful tool for us investors. With a securities loan, the loan amount is secured by one's own portfolio. This means that the securities held in the portfolio are lent on, based on their individual risk.
In the case of German and European shares, the mortgage lending value can be up to 70% of the market value. But of course bonds, participation certificates, ETFs or investment funds can also be lent. In practice it runs off then in such a way that a maximum possible credit sum is agreed upon. However, you can only use the amount that is currently determined by the collateral value of the deposit.
Here is an example: If an investor holds in his depot mainly German standard stocks, which at the moment have a market value of 10.000 euros, it can therefore by a granted securities credit in addition over 7.000 euros. He can use this money, for example, to buy more shares, which are then also lent again, thus further increasing the financial scope of the securities loan.
At some financial institutions, such as Comdirect Bank (WKN: 542800), the money can also be used for purposes other than buying securities. However, this should be avoided at all costs and the securities loan should only be used for what it is actually intended for, namely the purchase of securities.
The costs
A securities loan differs from a loan for consumption purposes, among other things, in that you do not have to pay regular installments, but as a rule only interest must be paid on the amount drawn. This interest is usually settled and collected by the bank at the end of each quarter. So with this, you don't have to bear high monthly recurring costs as is usually the case with a normal loan.
Since the securities you own serve as collateral for a securities loan, the interest rates charged are usually within a tolerable range. Currently, they are approximately in a corridor of effective 3.98 to 5.51% per year (as of 04.11.2019). But one should note that the interest rate is variable with many institutions and therefore there may be changes during the term of the loan.
Attention to the handling
So a securities loan is definitely a fine thing. But there are a few things to keep in mind when using it. I would not stretch the credit line too far if possible. In the event of a major correction, the value of the securities lent may quickly fall below the amount of the loan.
One could set a limit here and proceed for example in such a way that one prescribes oneself never to take more than 20% of the current depot value as credit. That would be with a depot level of 20.000 Euro still 4.000 euros that would be available for additional purchases. And you would have the security of knowing that even if your portfolio value declines by 50%, you don't have to worry about forced sales of your securities.
Conclusion
A securities loan opens up completely new possibilities for investors to increase their scope when buying securities. It is inexpensive and easy to handle. But you should always exercise the necessary caution to avoid the embarrassment of having hopelessly overdrawn your credit limit.
If you follow the instructions on how to use such a loan and do not overburden your securities account, I believe that a securities loan is an extremely interesting way of increasing your room for maneuver in your securities transactions.
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Andre Kulpa does not own any of the shares mentioned. The Motley Fool does not own any of the stocks mentioned.
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