Don't Use a Loan for Buying Stocks

DON'T BORROW MONEY TO BUY STOCKS

Most of the current market decline is a direct consequence of hedge fund and mutual fund managers having to sell stocks they possess as a result of frightened investors. And in many instances, this obligatory selling has also taken the shape of margin calls.

Take into consideration the shares Cisco (CSCO) which dropped 45% over a four day period last year. The movement of this stock seemed like 'panic selling' and the nation later learned that the largest shareholder of the company (which is also the co-founder and CEO) was required to sell most of his 6% claim in the company between Tuesday and Friday. How come? To satisfy the triggered brokerage margin calls as a result of him purchasing a portion of his shares with money that was borrowed.

In general, it is a very bad idea for individual investors on any level to borrow money for the purpose of buying stocks. Every now and then, there are great opportunities that can be entirely enclosed and therefore utilizing margin can be induced if downside risk can be hedged away, but guessing the future movement of a stock's price rooted on basic bullishness (the situation with Cisco) with money that is borrowed is a formula for probable failure.

John T. Champers, the CEO of Cisco, paid the most extreme consequence by being required to sell 95% of his share in his own company...during a week in which the panic on Wall Street was the worst it ever was. Learn a lesson from the poor practice of Mr. Chambers and don't make the similar blunder he did by speculating with money that has been borrowed. The investment banks have been hammered by leverage, but it will also result in the individual investor to find themselves in serious trouble as well.

When Using a Personal Loan is Not a Good Idea
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Being a Wise Borrower

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