Leverage money to invest more profitably
 Leverage
is a powerful concept. It lets you use one dollar to control
more than one dollar. You use leverage when you buy a house
or when you finance a car. You have the asset but you’ve
had to put up only a fraction of the price.
You can do the same thing with investing – it’s
called investing on margin – and it allows your investment
dollars to go farther.
Once you qualify for a margin account with your broker, you
would be able to borrow money against your marginable securities,
which can be anything from GICs and money market instruments
to stocks, bonds and mutual funds.
You can typically borrow up to 50% of their value. So if
you had $50,000 worth of marginable securities, you could
borrow up to $25,000 against them.
You can then use that $25,000 to invest in anyway you like.
If the value of your investments increases by more than the
interest rate on your margin loan, you’re ahead of the
game.
On the other hand, if the value of your investments goes
down, or if the value of the marginable securities you borrowed
against goes down, you may receive a “margin call”,
requiring you to deposit more funds to make up for the lost
value.
Investing can be risky. Investing with borrowed money increases
the risk. If you’re going to use this strategy, you
should feel comfortable about investing using credit. For
many investors, the advantages can often outweigh the risks.
Simply put, investing on margin may not be appropriate for
all investors. You should always consider your time frame,
asset allocation and your risk tolerance. In short, only you
know whether a margin strategy is right for you.
If you’d like to know more about investing on margin,
click
here to find the RBC financial planning professional closest
to you.
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