# Trade with borrowed money

#1

Could someone help, I traded for a whole about a year and a half ago, backed out after some losses, decided to learn more on this subject, my query is: are there people who trade on borrowed money, is it safe to do so?. Also ,when should we actually start such an endeavour, is there a level of understanding which one of you experienced traders could describe? (After attaining a certain knowledge on the subject), if so where is that height or attainment level when we are eligible to trade with borrowed money?

#2

Never trade on borrowed money. There were people who borrowed money and lost everything. Do it with your own money or do simulated trading before you are confident.

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#3

Please do clarify, I have a small doubt, might be silly, what I think is whether the money is borrowed or oneâ€™s own, a loss is a loss, the only difference is: one has to pay back the money after sometime, if itâ€™s borrowed ,after the loss, but if the money is oneâ€™s own you have to just swallow and bear the loss? Please do consider my doubt, as an thoughtful about this issue.

#4

Leverage works for you only when you understand it well and sometimes even then it doesnâ€™t.

Hereâ€™s are two illustrations:

1.
You have 1000 Rupees and borrow 1000 Rupees @ 24% p.a. for a month.
You buy securities with the 2000 Rupees you have and at the end of the month you sell them for 2500.
Your obligations are 1000 Rupees plus interest i.e. (2% of 1000= Rs. 20) Or, Rs. 1020. Your Profit is 2500 - 1020 -1000 = Rs. 480

If you had not leveraged, your profit wouldâ€™ve been 1250 - 1000 = Rs.250

2.
You have 1000 Rupees and borrow 1000 Rupees @ 24% p.a. for a month.
You buy securities with the 2000 Rupees you have and at the end of the month you sell them for 1500.
Your obligations are 1000 Rupees plus interest i.e. (2% of 1000= Rs. 20) Or, Rs. 1020. Your Loss is 1500 - 1020 -1000 = (Rs. 520)

If you had not leveraged, your loss wouldâ€™ve been 750 - 1000 = Rs.250

Hopefully, this helps a bit. All the best learning.

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#5

Thanks, a decent illustrationâ€¦

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#6

@MohitBangalore has illustrated it best.

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#7

Well Mr. Gupta, I am very much in your side.

1. Is there any trade/ Business running 100% on equity? Most of the business have 25% equity only.
Then why you ask not to trade with borrowed funds?

2. I trade for the past many years with borrowed funds from Bank (CAS- cash against security at 50%) and also from my broker (NBFC upto 75% of security) without any difficulty. I pay interest at 10.5% and 14% respectively. The high lights of my trade are:

3. I do not use stop loss. It is a wrong concept of Western world. Have you ever seen a businessman (Jewllery to vegetables trader) selling his commodity for a loss? They better wait than making a loosing trade.
When the trade is against me, I prefer to hold the stock till the opportune time by paying interest, rather than loosing 5% of money immediately by stop-loss. My cost of holding works out to 14% per annum or 0.04% per day (instead of 5% stop loss)
About 95% of my trade has made profit. Pay interest and waiting has given me good dividend. (Recent example is Jetairways, when my holding was (-)55% ran to +15%, when take over news came). Waiting always beneficial, and uptrend comes fairly soon. My trading pattern is as follows:

4. I always do Equity Delivery trade in uptrend.
I strictly follow Technical Analysis .
I do swing trading and I get 5% profit in about 3 weeks time.
I follow about 20 stocks and trade daily in 1 or 2 stocks.
Even though I am fairly old, I devote about 10 hours for trading with enthusiasm,

Best wishes.

.

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#8

Thanks there Mr Gopinath, nice to know atleast someone trades with borrowed money, although the risks may be big, that was a good piece of adviceâ€¦

#9

@shashankgupta dude first of all what is your trade plan? short to medium term? futures options commodity or day trading ?
Do you have a reliable trading system? how much were you profitable in the past
IF YOU WERE NOT CONSISTENTLY PROFITABLE IN THE PAST DO NOT BORROW MONEY
First Trade small be consistently profitable in terms of months
even after all this i will advise not to borrow money unless youâ€™re striking a deal with someone to share profit/loss

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#11

It is really a wrong option to trade on someone else money or borrowed money. You will get extra pressure if you are trading on borrowed money. You have to invest the money which you can afford to lose without any damage to your daily or monthly budget. Thanks

#12

What was your succes rate when you traded on borrowed money ? Or you never will. If you do have some success, then you really need to start trading on those really. So how does that sounds to you ? See my point ? There is no point to trade on borrowed.

#13

Rakesh Jhunjhunwala.

But, before trading with someone else money, you need to have that self conviction of being born under a lucky star.

#14

Have a trading system with concrete buy, sell rules, backtested for atleast a 1000 trades ( single scrip recommended if youâ€™re just beginning ) , note max drawdown, if you end up positive at the end of those 1000 trades, you can have some peace of mind to trade with borrowed money.

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