Borrowing to Invest: Understanding Leveraged

The Department of Financial Transactions have put together this guide in the aim to relay information to fully understand the implications of how leverage is used in investing. It provides an overview of how to borrow to invest.

It is highly important that you understand fully all the risks involved in borrowing to invest and utilizing a leverage strategy as part of your portfolio.

What is Leverage?

By using leverage to invest basically means that you are borrowing money to allow you to fund an investment opportunity.
If you have ever done any of the things below then you have used leverage in your transaction.

  • Made use of a credit card to pay funds to invest.
  • Borrowed money to purchase stocks and shares.
  • Used margin to fund securities purchases.

By utilizing leverage as part of your strategy it generally increases losses as well as gains, as a rule of thumb, if you cannot afford to lose money then do not borrow in the first place. You must carefully consider your circumstances before using leverage and follow your strategy that both you and your adviser have set down. You must both accept the risk and ensure that it is covered.

Can You Handle The Risk?

Before you consider going into leveraged investment, you should consider the following:

  • Have you fully considered the offer, and all the risks associated?
  • Are you in a position to lose your investment if things do not go to plan?
  • Review your profile and look at the risk options in your portfolio, is the offer within the guidelines?
  • If you have taken a leveraged load, do you have the means of paying it back?
  • When calculating the loan repayments have you taken into account any interest accrued on the loan?
  • Do you study the market often, are you keeping abreast of current interest fluctuations, and how they affect your situation?
  • Have you set out the worst case scenario’s in case of loss, can you afford it?
  • Does your plan take into account any tax implications on the investment, have you factored them into the financial plan?

Lesson 1 – The Secured Investment Loan

Mike Smith uses $50,000 for a bank credit line to buy shares, to do this he places his house as security against the loan.
Mike as used leverage here, because he has borrowed money to invest in securities.
He is gambling that his investment is successful and will be more profitable than the loan repayments and the interest he has to pay back.

However, if this plan is not successful, his commitments to the bank still stand, he is obliged to pay back the repayments.
If his investment continues to bomb he may be forced to sell them at a loss, and if the amount does not cover the loan then his property becomes forfeit.

And any collateral placed as security, can be taken by creditors as payment toward the debt owed.

Lesson 2 – The Mutual Fund Loan

John has saved $100,000 towards his retirement fund, which is still five years away. John doubts that this sum will not be sufficient to support his lifestyle for his retirement. When consulting a financial adviser, John is told the financial adviser can arrange a loan of $100,000 to match John’s fund which can be used to invest to hopefully gain extra money.

The investment broker tempts John with the idea that the securities investment will easily outperform the repayments that are due on the loan. To demonstrate this example we have assumed that companies allow 10% of holdings to be sold each year without triggering deferred sales charges.

If the investment goes to plan and targets are met, there is no problem. But if the stock declines in value then John still has the same interest repayments to find. At this juncture it is worth noting that the financial adviser would receive a large commission payment for facilitating the deal. This payment might be followed by others in the form of trailer fees. John should have calculated any risk elements that could be involved by going into debt when the market is uncertain.

When you invest in any securities it does cover some risk, and when investing you should always be in a position to repay any loans from separate funds. All investments carry fees of some description and should be included in your calculations from the beginning. Some investors see Mutual Funds as the way forward to increase their investment power and possibly to gain a higher tax return.

Some investors even use the tax element to pay the loan or part of it, decreasing monthly payments and interest owed.

Advanced Leverage Techniques

Buying on Margin

When you purchase shares on margin this actually means that only a portion of the securities are paid for.

The balance of the deal then comes from a registered investment dealer. The dealer is only allowed to fund a percentage laid down by federal securities laws, and this sum is known as “the maximum load value”. This maximum loan value depends of what type of stock it is.

What Are The Risks of Borrowing on Margin?

There are associated risks involved by using margin, a “margin call” happens when the dealer makes a decision because the loan you are asking for is over the permitted in the loan value. On this the dealer can request that extra funds are placed to cover the amount of the loan outstanding. If you are unable to do this the dealer can even sell some or all of the shares to make up any difference, this can be done at a loss also.

If the markets decline, as they can easily do, then borrowing on margin is a very fast way of losing money.

It does allow you to purchase larger amounts of securities, but this can be a disadvantage also. To use margin as part of your investment strategy you must have plenty of disposable funds and can quickly act if things do not go to plan.

Short Selling

If you take advantage of market decline by using leverage this is termed as “short selling. ” If it is possible to foresee the market dropping in a certain security, it is possible to borrow stock of that security and then sell it at the current market value. If the price goes down then you can purchase the shares at the new reduced price and return the stock you borrowed. The difference between the two prices is your profit.

What are the Risks of Short Selling?

Once again there are risks associated with short selling. Trying to predict what the market is going to do is a gamble, and if your prediction is false you can end up losing heavily. A large consideration is that the margin requirements for short selling are a lot higher than they are for normal margin borrowing, because of the risks associated of using borrowed securities.

If you are engaged in any sort of margin activity it is important that you are aware of the implications and the obligations involved, and that you have the additional funds to meet them. For instance, if you cannot meet a margin call or do not meet the required repayments on interest, the dealer has the right to sell the stock, and this is often at a loss. Normally short sellers are cash rich and can ride with the rough as well as the smooth.

How to Buy and Sell Securities

Selling and buying stocks and shares can be a little complicated if you have not previously done it.
So we have listed a few of the basic rules.

There are two basic ways to trade shares:

Contact The Department of Financial Transactions and get a name of a permitted financial adviser.
To become registered he must undergo proper training and will have the relevant experience of the industry and the current market. This knowledge will help to give proper advice to probable investors. The investment company he works for must also be registered.

You may prefer to go direct to a trader, that is registered as an investment dealer. This is a very common way for investors who are beginning and there are many that own their own individual accounts and also manage portfolios themselves. This route is really for people who understand the terminology of the law and financial dealings. Also have no problems understanding prospectuses etc.

Regardless how you intend to make your investments there are some important factors that you have to bear in mind.

It does not matter how you invest you must understand that markets can go down as well as up, due to all sorts of reasons, including players that are just gambling exactly on this. You might only see a profit in the end with the simple fact how quickly your instructions to buy or sell was processed.

Market and Limit Orders

Giving permission to your dealer to trade at current market prices then you are placing a “Market Order.

“If you place an order with a tag attached to it, you will have more control over that order, both in monetary and time terms. Placing a “limit order” will allow you to put a price on what you want to buy or sell at. It gives you the comfort that you will never have to pay more than the limit placed on your instructions. And by the same token your shares will never be sold for less. If the limit placed is not reached then the shares will not be bought or sold.

Types of Limit Orders

There are different styles and types of limit orders, and to be exactly certain your instructions are followed implicitly then one can place a particular specified order. The orders vary but it could be, a “day order” which is only valid for a particular day. Or say an “open order” which is valid for thirty days. A “GTC” order means that it is good till cancelled, and will remain current until this happens.

Whatever type of order you place it will only be activated when the instructions are met, and you have the appropriate funds to pay for it. Or you have arranged alternative means such as a margin account from your broker.

Buying shares and the success ensuing really depends on a few factors, such as the securities that are being traded, the amount being traded and of course market conditions.

Investing and the Internet – Be Alert to signs of Fraud.

Perhaps one of the most progressive tools ever to grace society is the world wide web, it is an extraordinary depository of instant information and an incredible reference source for investors to search for investment opportunities and look at trading markets.

Among all the wonderful reputable advice and sincere companies that are to be found such as: stock exchanges, financial advisers, mutual fund companies, and government agencies who have all published valuable information on products and investment opportunities. Most people in the world now have access to the internet and net has more information now than at any other time on everything from markets to company information.

Using the net as a source of information to invest upon is fine up to a point, you must also be aware that there is no real efficient policing of the material that is published, and there is just the same amount of chance that the information you are reading is fraudulent as true.

It is an impossible task to try to stop fraudulent activity on the internet, but The Department of Financial Transactions is trying to implement measures for investors safety. So if you are using the internet as your own source of advice the advice is tread with care.

Unregistered Trading

To deal in trading or to advise on the markets it is a legal requirement that any such company or person must be registered in the state that they are operating in. Dealers from abroad try to get into the market by means of the net, and are dealing illegally.

Online Touts and Promotions

The Web has many posted online forums, news associations, bulletin boards and chat rooms dedicated to trading and investment in securities and these can be useful tools for information based on finance.

Whilst this information can be good, investors must also be aware of pitfalls and that people using these forums and chat rooms are not always who they purport to be. Crooks use the same sites as bonafide firms to advertise. They often use bogus identities, a place messages to lure interest in a certain stock, quite often one that is traded over the counter, as then it is under the radar of regulations.

This advertising can often use testimonials of supposedly satisfied investors who have made pot fulls of money buying and selling the same stock. Sometimes these crooks add the tit bit that the securities have not yet been traded an it would be wise to invest quickly. To say this is illegal, it is insider dealing.


Chat rooms and forums are normally in the public domain, and therefore anybody can post information. The Department of Financial Transactions are becoming more and more aware of false information on the internet especially concerning investment opportunities.

This fabricated information is normally posted by a cover firm or anonymous, so trying to regulate and stop it is difficult. Less sinister is that the information is not fraudulent, but just a case of totally wrong data that has not been properly researched and no way could be relied on for important decisions such as filing to regulators.


It is hard not to underestimate the power the web now wields, its influence is of a highly significant nature, and it also allows a portal to crooks and fraudulent firms to trade under false pretenses of things like thinly traded stock.

Reading about “hot tips” with huge potential gains and low risks can allure the unsuspecting investor.

What they may not be aware of these opportunities are not what they are supposed to be.

Such naive or greedy investors sometimes are quick to swallow up such attractive offers and do not want to miss out on a deal of a lifetime. The fraudsters then cash in on the scam.

When the hyped up securities fall, the sellers blame short-selling, and they might even raise the cash embezzled by “averaging down” by buying up more of the same stock when prices start to fall.

Shortly after the scam the shares disappear from the market, and the regulation authorities are wondering whatever happened to company X.

These sort of scam and sting operations have been going on since the birth of the stock market, but the internet has now made the world a lot smaller and easier for crooks to manipulate their prey.

Illegal Distributions

With wide access available to the internet everywhere, new firms are muscling in and trying to sell securities illegally. There are regulations in place that stipulates that shares must only be sold when the companies involved have be cleared by the appropriate regulatory body. Even if these companies pass this check, only registered and authorized dealers may trade in securities.

Everyday there are new cases of crooked activities by firms marketing and selling their stock to the public using the internet. These fake companies have not filed a prospectus and are not bound by any legal commitment to give any information about themselves or the securities they are trading in.

Protecting yourself from online fraud

Scam tricks and sting operations are as old as securities themselves, and the addition of the internet make them easier to operate.

Below are some simple precautions so that you do not fall foul of such underhand tactics:

  • Do not believe everything that is published online.
  • Any purported “hot tips” or special one-off deals should be treated as though a complete stranger came up to you with them on the street.
  • Always treat information posted as dubious unless it has a source of reference in its authenticity. Do not forget having a false identity on the internet is easy.
  • Treat overseas investments with care
  • If you do not fully understand the investment opportunity stay clear of it
  • Do not believe that the person you are communicating with over the net is who they say they are
  • The same goes with online forums and chat rooms, who are these people?
  • Does the person you are communicating with have the required qualifications?
  • Service providers on the net do not have a requirement to ensure any data published is true.
  • There are no real security systems placed, so a crook can post 1,000 posts of the same non-existent stock.
  • Never deal in thinly traded stock, and do not ever judge that they are real purely on information gathered from the net.
  • Securities that are regulated are a different matter to thinly traded stock, in that low priced securities can easily be traded in small deals. Most fraudulent offers are in securities that nobody ever heard of.
  • Prepare yourself and always do proper research through recognized channels.
  • If anybody come to you with supposedly “inside information” then run a mile. If it is that good, why are they telling you? And “insider information” is illegal.
  • Watch out for agents that have a conflict of interest, this means that they are working for the companies that the stock represents. Proper agents will tel you this at the outset.
  • Ask why the agent is keen on the securities he is selling?
  • Always check that the dealer is allowed to sell securities?
  • The legislative bodies concerning protecting investors in trading are not present on the net.
  • If the company or agent you are dealing with does not adhere to the regulations this is a good indication that the deal is not legal.
  • Contact your securities register if you have doubts, they can give you information if the person or company is registered and if a prospectus has been filed.

Top tips to keep track of your Investments

It is highly important that you keep track of all your investments, and in this modern world that we live in sometimes this is not easy. You must review your finances and investments on a regular basis.

Any official documentation that you are sent, make sure you read it fully and understand the information it purports to, especially including prospectus and statements. This important information will inform you all about your investments, your possible returns and also the risks involved. To help investors there is now simpler forms of prospectuses available that are easier to digest, also ensure that your instructions have been conducted as they ought to have been via the statements. If you find anything wrong report it straight away.

In your inspection of your statements if you find that you have been charged an incorrect fee, or there is a wrong transaction then it is important that you bring it to light immediately, as this way it is easier to rectify. If you have not been receiving regular statements this is often a sign of identity fraud.

Stealing mail is a common practice, think of all the personal information that gets sent you. Crooks can act upon receipt of such information and apply for things like credit cards in your name.

Whenever you meet or have conversations with your financial adviser always take notes and keep complete records of any instructions you have issued or their advice.

When you are dealing with your finances and investments, always ask pertinent questions, if something is not clear question until you do understand. If you are not sure then cross reference it with a third party.

Perhaps you prefer not to trade online, and if so do not let this deter you from opening up an internet account. Online accounts can make your life so much easier and access is available 24 hours a day. You can do things like check balances and keep track of your investments so you can see there is nothing wrong.

When you first engage the services of a dealer it is important that you form a good relationship, visit their offices and meet personally. Subsequently dealings may be done on the phone, but the adviser needs to know your strategy and how you want to run your portfolio. Ask about the firm before you engage them, see if they are the right fit for you.

On occasion, review your agreed portfolio with your adviser. Check that it is on track doing what the objectives were set out for it to do. As time passes many investors like to tweak and amend their portfolios, make sure your adviser is always kept up to date on your personal finances and to tailor make a plan to keep you on the right path.

Always research the firm or agent that they are registered, you can do this by contacting your securities regulator. Any firm or dealer must be fully registered before they can trade. And if they are registered check what the are allowed to trade in, are there any limitations or levies placed on them?

Are Your Money Styles a Match?

This section is especially for those people who are intending to get married and the implications that must be thought of financially. Planning your wedding and its budget probably is the first major undertaking in terms of financial planning that a couple makes. For you to go ahead in life together and build a future, then the individual approaches of each partner should be considered and respected.

The Following are Types of Money Managements

The Savvy Saver

Somebody who is classed as a “savvy saver” is a person who takes their savings and finances seriously. They would have drawn up a financial plan and will be sticking to it. They understand the ethos of borrowing and that is something that can be used, but cautiously. Before they spend, they will have earned extra finances and all of their financial habits are good, ready and in place for future life. Sometimes these sort of people do not live life for the now, and they should understand that sometimes it is OK to spend a little.

Sometimes Savvy / Sometimes Super Saver

This person does understand the need for financial planning and there are times the little luxuries in life are okay. Sometimes they follow sound fiscal advice and other times they opt to ignore it. They are mostly prudent in their spending and saving but there are times that a new suit comes first.

Most of their expenditure is controlled and they save monthly according to the plan. However, sometimes they do need assistance to write a controllable budget that they can easily adhere to. They need to identify the external factors that could jeopardize the plan and put things in place to overcome them. Perhaps set aside a shopping account separate to the budget fund.

“The next round’s on me!”

Portfolios and savvy tax-efficient investing do not interest this person one little bit. Financial budgets are what is stopping them living their lives to the full. There will be not financial plan and these sort of people live from pay check to pay check. It is common that there are unpaid bills and outstanding payments to be made.

If however, you fall into this bracket then some remedial work needs to be urgently done. You need to seek out professional financial advice and arrest your monetary downfall. You need far more self-discipline and you urgently need to come up with a plan for your finances. Perhaps set limits how much cash you can spend on a weekly basis.

What’s Next?

Most couples, not surprisingly, have different individual priorities in life and money. You must learn as a married couple to understand each other’s wants and financial leanings and learn to compromise.

For any couples seeking financial advice how the two go forward as one is a good idea. Finances are an emotional issue and an advisor can offer an independent viewpoint based on his experience. If you have already done this then good luck for a happy and financially sound future.

Penny Stocks

hares that are of a low price and often under a dollar are termed as “penny stocks”. They are usually traded as securities with a lot of future potential.

When firms first come on to the stock market they often issue penny stocks, as they have not been in business for very long to have a recognized good reputation or a long standing trading record. The firm may also have an inexperienced board and management team, these are all factors that can make the market nervous.

When you enter into the world of penny stocks, you should be aware that there might not be a market that exists to trade the stock at a later date. The term penny stocks is named thus for exactly this reason.

Some investors are confused by the term, it is a fact that penny stocks are considerably risky stocks, and unless the investor has considerable wealth to overcome severe trading losses, then it is wise to stay clear of these sort of securities.

Get the Facts

When dealing in penny stocks you must be aware that these sort of securities are easily open to manipulation. Many confidence tricksters use penny stocks as a high percentage of investors do not investigate them properly.

The widely used pump and dump scams often use penny stocks as their bait. An entity accumulates a high volume of penny stock, and then uses high pressure sales techniques to sell them on the market.

Initially the price rises, an as long as the entity can draw new investors into the scam the whole scenario continues. When new investors and present investors buying up more penny stock then the value of the stock become liquid and the price falls. Investors now have worthless stock on their hands.

Where to go for Information

Fraudulent people and companies are getting increasingly more sophisticated and keep inventing new ideas how to defraud and spread false information. Therefore it is always wise to cross reference and investigate any information with a reputable source.

Financial and corporate information comes if many forms including:

  • Yearly Reports.
  • Financial Statements.
  • Prospectuses

All this sort of information can be gleaned from, stock exchanges, public libraries or your financial adviser and dealer.

There are a minimum set of listing requirements before a company can look to sell shares. These listings all are concerned with the firm’s financial status, their shareholders and the management team. If the firm cannot satisfy these requirements then they can only trade over-the-counter securities. This market consists of a network of dealers who trade together for the benefit of individuals or even themselves.

The Changing Markets

In nearly all cases penny stocks are traded this way or on smaller junior exchanges. This can be of benefit to some investors as there are regulations covering these institutions. They also have a fair and transparent market and offer protection through standards bodies, good regulation and works on current regulations.

How do you recognize a Penny Stock Scam?

Following is a list of some tell-tale signs of a penny scam being in operation:

  • The initial contact made that is also unsolicited, is normally made by phone, fax, internet.
  • The tactics used a highly pressurized sales tactics, urging you to make a snap decision The offer is for unusually high gains, and such guarantees are not allowed. No officially registered dealer would make such claims.
  • The claims of associated small risk, high gains come hand in hand with high risk.
  • Also if there is an offer to discount fees and commissions something is wrong, normally penny stocks are traded with higher commissions “Insider Information”, if this term is used terminate any further conversation, at the best this is illegal and carries severe penalties.
  • Non-disclosure of any shareholder information is a big red flag. No reputable dealer would withhold such information.

The Department of Financial Transactions are continually tracking recognized fraudulent firm engaged in pump and dump type operations. If you are offered dubious stock deals even from reputable sounding companies it is always worthwhile doing your own investigation, get independent advice.

We are leading the field in providing investor protection, but always try to help yourself by having all the correct data at hand.