Borrowing to Invest: Understanding Leveraged

The USLCB have collated this guide to hopefully give you information to understand how leverage is used in investments. It is intended as an overview of how to borrow to invest. You have to understand all the risks in borrowing to invest and using a leverage strategy as part of your portfolio.

What is Leverage?

Using leverage to invest means that you are borrowing money to fund an investment opportunity. If you have ever done any of the things list below, then you have used leverage:

  • Utilized a credit line to access funds to invest
  • Borrowed money to purchase stocks and shares
  • Used margin to fund securities purchases.

Various people from all walks of life use leverage to invest, this include large corporations to individuals. A firm with a lot of debt is sometimes referred to as one that is highly leveraged. If conditions are right leverage can be useful, but it is not to be taken lightly.

Using leverage normally increases losses as well as any gains, as a general rule if you cannot afford to lose money do not borrow. Leverage should be in careful consideration to your portfolio and should follow the plan that you and your financial advisor set down. Both of you should accept the risk is covered.

Can You Handle The Risk?

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

Are you fully up to speed with the the offer and all the risks involved?
Can you afford to lose your collateral if things go wrong?

Look at your risk profile in your portfolio, is the offer within the guidelines?

Is the leverage loan within your means of paying back?

Have you added into the equation the interest and repayment terms of the loan?
Are you keeping abreast of current interest fluctuations, how will they affect you?

Have you set out the worst case scenario’s in case of loss, can you afford it?
Have you taken into account any tax implications on the investment, have you factored them into the financial plan?

Lesson 1 – The Secured Investment Loan

Paul Andres uses $100,000.00 for a credit line from a bank to purchase securities. He puts his home as collateral for the line of credit. What Paul has done here is a type of leverage because he has borrowed funds to fund his investment. Paul is gambling that the investment will bring in more profit than the loan and the interest will cost him.

If this pan is not successful and Paul’s investment does not perform well, he still is committed to pay his monthly line of credit loan. If the investment continues poorly he may have to sell the securities at a loss, if this sale does not cover the original loan then his house is forfeit.

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

Lesson 2 – The Mutual Fund Loan

Bryan has amassed $200,000.00 for his retirement, which is a couple of years away. Bryan is not certain that this is enough to support him in retirement. After consultation with a financial wiz kid , Bryan is told that the guru can arrange a loan of $200,00.00 to match Donald’s retirement fund which he can then use as mutual funds to invest.

The investment sage sells Bryan on the idea that the securities will easily outperform the monthly payments that are due on the loan. For this example we have assumed that firms allow 10% of holdings to be sold each year without triggering deferred sales charges.

If the securities match all targets then there is no problem. However, if the securities decline then Bryan still has interest payments on the loan. It may not have been pointed out that the financial advisor at this point would have received a large commission payment for the deal, and this could actually be ongoing (trailer fees). Bryan should have calculated the risk element and if he wanted to go deep into debt on an uncertain market.

Investing in securities always carries some risk, and investors should always be able to fund investment loans from private money. Another part to such investments are the fees involved and they should be included at the outset. Investors see Mutual Funds as a way of increasing their investment power and also to possibly generate 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

Buying securities on margin means that only part of the value of the shares are initially paid for. The balanced is then funded from a registered investment dealer. The investment dealer is only allowed to fund a certain percentage set down by federal securities law, this amount is known as the “maximum loan value.” This maximum loan value depends of what type of securities they are.

What Are The Risks of Borrowing on Margin?

A “margin call” is when the dealer makes a decision because the loan you are seeking exceeds the amount permitted in the allowed loan value. When this happens the dealer requests that you deposit extra money into your account to cover the amount of the loan. If you cannot do this the dealer has the right to sell all or some of the securities to make up the difference, even if this is at a loss.

Margin borrowing can be a very quick method of losing money if the markets decline. Admittedly, it is correct that you more stock can be purchased using this method, but you can end up losing a lot more on the deal as well. It is imperative that you are well-funded in this type of investment, and can act quickly to transfer money if a margin call is used in an uncertain market.

Short Selling

By utilizing leverage as a way to take advantage of market declines is called short selling. If you can tell that the market value of some securities may be about to drop, you can borrow stock of that security from your dealer and sell them at the current value. If the price goes down then you buy the stock back at the new reduced price and give back the stock you borrowed. The margin of difference is your profit.

What are the Risks of Short Selling?

Trying to predict that security prices will fall is a calculated gamble and if you get it wrong then you will lose. A big consideration is that margin requirements for short selling are considerably higher than they are for normal margin borrowing, because of the additional risk of utilizing borrowed shares.

It is therefore important that entering into any form of margin activity that you are fully aware of the implications and obligations involved, and that you have the means to meet those obligations. For example, if you cannot meet a margin call or neglect interest payments, the dealer has a full right to sell your securities, often at a loss. Normally investors dealing like this and are involved with short selling have large cash deposits at hand.

How to Buy and Sell Securities

Buying and selling securities can be complicated to the initiated, so we will ay a few ground rules down for you.

There are two basic ways to trade shares:

  • Firstly you can employ a registered financial adviser who is permitted by the USLCB. To become registered he will have been fully trained and have expert knowledge of the industry and the current securities on the market. This background that his employing company has in the market puts the adviser in a good position to recommend potential investments. The investment company that he works for also must be registered.
  • Secondly you can go straight to a trading firm that is registered as an investment dealer. It is a common way for smaller investors to transact their dealing in this manner, and there are many investors that have their own individual accounts and manage their own portfolios. However, this is only really for those people that understand finance and legal terminology, and can wade through and understand all the prospectus’s etc.

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

You must understand that some markets can fluctuate greatly from all manner of reasons and outside influences, including people that just gamble on the stock exchange. And the matter if you see any profit or not might just depend on the small factor of how quickly your instructions were carried out and processed.

Market and Limit Orders

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

However, if you place a purchasing order with a limit tag on it, you then have more control over that order. Both in time and also in monetary terms. A limit order will allow you to place a figure on what price you wish to either buy or sell. You will never have to pay more than the limit you placed on your instructions, and your securities will never be sold for less. If the limit is not attained then the securities will not be purchased or sold.

Types of Limit Orders

There are different types of limit orders and to increase the likelihood of your instructions going through you can place a particular type of limit order. This may be a day order, and that instruction is only valid for that particular day. If you place an open order it is then valid for thirty days. A GTC order is ‘good till cancelled’ and stays current till you cancel it.

Which type of order you place it will only be activated if you have the appropriate funds in your brokerage account to meet that order, or you have made alternative arrangements for a margin account from your dealer.

Purchasing securities success depends really on a number of elements;, the status of the firm and the amount of stock being traded, and the economy.

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

The internet has been cited as the one most progressive thing of today’s world, without doubt it is an extraordinary library of data and is an incredible resource for investors to look into opportunities, financial markets and personal investments.

There are numerous reputable organizations, news agencies, stock exchanges, mutual fund firms, financial advice companies, government agencies that have established thousands of websites that provide a complete mix of current information on investment opportunities and products. Anybody with access to the net has more information than can be imagined on everything from markets to corporate data.

Perhaps you are seeking an investment opportunity and are using the internet as a reference source, you must bear in mind that as good as the World Wide Web can be it is just as effective for fraudulent people to place information on there as well, with the main aim to part you from your money.

The USLCB has taken many measure to try and ensure and prevent internet fraud, but it so massive and complex that there are still many place for these scam merchants to operate. This means if you are utilizing the cyber-space for your investment, be very careful and always research and cross reference.

Unregistered Trading

To be in the business of securities trading or advising upon it is a legal requirement that any such persons or companies have to be registered in the state that their business is based in. More often, deaers from abroad are trying to deal via the net and are taking both clients and assignments from investors that they are not allowed to deal with.

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. But be aware that as well as genuine persons using these forums, swindlers use exactly the same sites to sell their wares. The do not operate under their own names, and place messages to grab attention in a particular security usually and one that is traded over the counter that is not subject to regulation.

Such advertising are often in the form of testimonials of people who have made money from trading in this security. Often without backup data to support their claims of “hot securities” that have not been released yet. Beware as these promotions are pure fraud.


Most public forums have an element of doubt regarding the information posted, and this is the same with the World Wide Web. Here at the USLCB we are increasingly becoming aware of fabrication of data in investment information posted on the internet.

These made up lies are anonymous or through a cover firm, making it difficult to find the original source. In other less sinister cases the misinformation is just a case of poor data that has not been thoroughly researched, as it is not official information such as data prepared for filing to regulators.


The power of the World Wide Web is extraordinary and utilizing its influence many fraudsters and scam agencies have used the resource to falsely raise the price of thinly traded stock.

Investors that are unaware read about hot tips with huge projected profits and little risk, sure fire certainties. They do not know is that the stock is held by a few individuals that are setting up ca con trick.

When greedy investors act quick to swallow up the securities and not to miss out on an incredible deal, the crooks cashed in their stock selling on a rising market.

When the hyped shares falls, the originators cite short selling. They might even add to their profits by proposing the investors to “average down” by purchasing more securities as the price falls.

Shortly after the stock disappears from sight, and regulators and authorities are puzzled by the disappearance of Company Z.

These sort of scams and sting operations have been operating for many years, but with the aid of the internet it has become far easier for fraudulent characters to abuse them.

Illegal Distributions

Everybody has access to being online nowadays and with the ease of use of the Net, new corporations are trying to offer shares illegally to the market. Regulation exists that states that securities may only be sold after regulators have investigated and sanctioned the selling firms. Even if these firms clear that hurdle, only registered and authorized dealers may sell the shares.

On a daily basis new cases come to light of fraudulent activities of companies marketing and selling their shares in public via the Web. These bogus firms have rarely filed a prospectus and have no legal requirement to give future investors with data about the securities or the company.

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:

    • Not everything online is true.
    • Treat special offers and “hot tips” online the same way if a total stranger in the pub just told you.
    • When reading any material have some doubt over its authenticity. Remember it is easy for people to have false identities.
    • If the investment opportunity is in some far flung place tread carefully.
    • If the investment opportunity is confusing and using technical phrases tread carefully.
    • Don’t believe the person you are emailing is necessarily them.
    • The same for forums and chat rooms, who are these people?
    • You do not know who the person is you are dealing with, do they have the necessary qualifications?
    • Online Service providers only partially protects the validity of the information posted.
    • There is no security mechanism in place for a con artists to make 1000 pitches about their securities if they wish.
    • Always treat thinly traded stock carefully and never judge their authenticity purely on the basis of online information posted. These opportunities carry the biggest risk.
    • Regulated securities are different to thinly traded stock in that low priced shares can be easily. traded in small deals. Most online scams are to do with little known firms.
    • Take your time and always do your homework through recognized sources.
    • The phrase “inside information” should give you alarm signals, if it is a closed secret then why are they telling you?
    • Remember disclosing inside information is illegal.
    • Be prepared for conflicts of interest, some of the salespeople or agents punting securities are being paid by the very firm who the stock represents.

Some more ethical agents disclose this but many do not.

  • Why is the agent or dealer enthusiastic for the securities he is selling?
  • Ensure before you purchase any stock, that the dealer is registered and qualified to sell securities.
  • Most of the security regulations in place to protect investors do not apply on the internet.
  • If the trading company or their salesperson does not abide by the regulations this is a fair indication that some fraud is being committed.
  • If you have any doubts whatsoever then contact your securities register, they can tell you if persons or companies are registered and if a prospectus has been filed.



Top Tips to Keep Track of Your Investments

In today’s modern busy world it is hard to keep track of all your finances and investments, perhaps you only look at them on an annual basis. This is really not good enough and it is important that you review your investments on a more regular basis.

Always read and fully digest any financial documentation that you receive, this is inclusive of prospectuses and any statements. This information is highly important and will tell you all about your investments, your possible returns and risks. There is now a simpler form of prospectuses that are more understandable, be sure you double check that any instructions you have given and confirmed by the statements, if any discrepancies exits then report them immediately.

By the same token, look for wrong transactions, fees or levies, anything that is out of place report immediately. If you report problems at once then they are often much easier to rectify. If forever reason you have not had a statement for a while then act immediately, this is a common sign of identity fraud. Stealing mail is far more common than you might think as there is a wealth of data and personal information contained in your mail. Fraudulent entities can apply for lines of credit and cards in your name if they have all the information.

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.

Always ask detailed questions about your transactions and investments, and if something is not clear then ask your adviser to explain until you understand. It is a good idea to cross reference data with a third party.

You may not be familiar to trading on line but do not let that deter you from getting access on the internet to your account. It will make life so much easier and you can get access whenever you want. To check on your finances you can easily get on the Net and check your balance, this enables you to keep track and catch any mistakes early.

You really need to form a good relationship with your dealer, it is recommended that especially on the first time meet him personally at his offices. After that may dealing can be over the phone, but he needs to firstly understand your philosophy concerning investing. Investigate the company first and see if they are the right fit for you.

Even though you may be more than happy with your adviser, continue to keep track of all relevant information pertaining to your investments through a reputable third party source. Read prospectuses and financial statements in detail, then make independent judgments about any future investment.

Now and then, review your investment portfolio with your adviser. Ensure it is on track and it is doing what you set it out to do and is achieving your objectives. Most people find that as time passes sight alterations are needed to their portfolio, make sure your adviser knows your personal up to date situation and tailor makes a plan to suit.

Remember to always investigate the agent or the company that they are registered, this can be done by contacting your securities regulator. Any such company or individual has to be fully registered before they are allowed to trade.

If they are registered, what are they registered to sell? And are there any limitations or terms and conditions levied.