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Borrowing money to buy shares

I could not believe my ears when someone told me that you can borrow to buy shares. As it seems as though it is true, could you explain what is the catch?

There is no catch, though many who have done this have been caught out, especially if they did it using margin loans.

These are offered by the banks and they allow you to borrow between, say, 30 and 70 per cent of the market value of the shares. Not all shares can attract these loans and the value of the shares have to fall a long way in most cases before they demand that you add some cash to the loan or you need to sell some shares to meet what they say is a margin call.

Not so long ago though, the big market fall brought this unpleasant reality home to many investors.

Now, more to the question and the tax rules say if you borrow to buy a house, shares, a work of art, a business or any other income producing asset, which in turn you will pay tax on, you are able to claim the interest as a cost against earning the income and this reduces the tax bill.

I think it’s a great idea to talk to an accountant or financial adviser when you are embarking on these deals that come with loans, tax deductions and various rules, or else be prepared to put in some time doing a spot of reading and note-making.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

 

Published on: Thursday, January 14, 2010

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