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Leveraged investing is defined as borrowing money to finance an investment. You are familiar with the concept of leverage if you've ever:
Both individuals and companies use leverage as an investment strategy; a company with a lot of debt is considered highly leveraged.
Leverage can be an effective way to boost returns in your investment portfolio, but you should also understand the potential consequences of borrowing to invest.
Leverage magnifies your losses as well as your gains, and you must be able to withstand those losses if you are going to use borrowed money to invest. The leveraged investment should be suitable to your investment goals and objectives and consistent with the "Know Your Client" information that you have provided to your advisor. It is both your responsibility and your advisor's to ensure that you understand the investment, and are comfortable with the risk level.
Here are some risks and factors that you should consider before borrowing to invest:
Is it Right for You?
Borrowing money to invest is risky. You should only consider borrowing to invest if:
You should not borrow to invest if:
You Can End Up Losing Money
When you borrow funds to purchase non-registered investments, the interest is only tax deductible as long as you continue to hold the investment or any substituted investment.
There are special exceptions to the rules related to tax deductions on interest costs designed to provide relief to investors who have borrowed money to buy investments that have since declined in value. This allows you to continue to deduct the interest expense on the loaned funds after the sale of the investment subject to certain restrictions, illustrated by the following:
These rules do not apply to investments in real or depreciable property.
To learn more about borrowing to invest contact our office.
Copyright © 2015 AdvisorNet Communications Inc. All rights reserved. This article is provided for informational purposes only and is based on the perspectives and opinions of the owners and writers only. The information provided is not intended to provide specific financial advice. It is strongly recommended that the reader seek qualified professional advice before making any financial decisions based on anything discussed in this article. This article is not to be copied or republished in any format for any reason without the written permission of the AdvisorNet Communications. The publisher does not guarantee the accuracy of the information and is not liable in any way for any error or omission. Discuss the risks associated with leveraged investment purchases with a financial planner before investing. Purchases are subject to suitability requirements. Using borrowed money to finance the purchase of securities involves greater risk than a purchase using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest as required by its terms remains the same if the value of the securities purchased declines.