The New Brunswick Securities Commission issued a warning in a press release published by Communications New Brunswick about the importance of knowing the risks when borrowing money to invest.
"There are substantial risks and investors need to know all of the facts before deciding if borrowing money to invest is right for them," explained Rick Hancox, who serves as the New Brunswick Securities Commission's executive director. "Ultimately, investors should know who they are dealing with and fully understand what they are investing in."
Borrowing money to invest is also known as leveraging, and is a legitimate investment strategy. It may appear to be a positive thing, however, it isn't for everyone and may not always turn out as planned.
Borrowing money to invest consists of taking out a loan and using the lump sum to invest money in a mutual fund or other type of investment product, hoping that the investment's returns will be more than enough to pay the loan's interest.
As money is being borrowed to invest, the interest paid on the loan is tax deductible and provides a cash rebate at tax return time.
Leveraging can be done in many different ways, but the concept is always the same.
The biggest problem with borrowing money to invest is the result of a decrease in the investment's value. The returns may not be enough to pay off the interest, so more will be needed to secure the loan and the overall result is a large loan to pay off.
Hancox said that measures do exist to guarantee that leveraging can work.
"There are suitability criteria set out by the industry that your financial adviser should carefully review with you before attempting this type of strategy," Hancox stated. "Investors should fully understand the risks and be extremely cautious if considering borrowing beyond their financial means."
The New Brunswick Securities Commission has outlined the following things to consider before deciding whether to borrow for the purpose of investing.
1) Are you dealing with a reputable and registered investment adviser and firm?
2) Has your adviser reviewed the suitability criteria? Do you understand them and do you meet them?
3) What are your investment objectives? Is leveraging the only strategy that will help you to achieve them?
4) What is your risk tolerance? How much money can you afford to lose?
5) What are the fees for setting up the loan? Are there ongoing fees or fees for early withdrawal from the investment of the loan?
6) Do you fully understand the leveraging strategy? How will you make (or lose) money?
For more information about borrowing money to invest, call the New Brunswick Securities Commission at the toll free number 1-866-933-2222.
The New Brunswick Securities Commission is an independent Crown corporation which oversees capital markets in the province of New Brunswick and controls those who sell and manage securities. The commission's mandate is to protect investors from any unfair, improper or fraudulent practices, along with fostering fair and efficient confidence in capital markets. The commission receives funding from fees paid by employees of the investment industry, which includes public companies, mutual funds, and over 7,000 registered people and businesses.
Source: Communications New Brunswick
"There are substantial risks and investors need to know all of the facts before deciding if borrowing money to invest is right for them," explained Rick Hancox, who serves as the New Brunswick Securities Commission's executive director. "Ultimately, investors should know who they are dealing with and fully understand what they are investing in."
Borrowing money to invest is also known as leveraging, and is a legitimate investment strategy. It may appear to be a positive thing, however, it isn't for everyone and may not always turn out as planned.
Borrowing money to invest consists of taking out a loan and using the lump sum to invest money in a mutual fund or other type of investment product, hoping that the investment's returns will be more than enough to pay the loan's interest.
As money is being borrowed to invest, the interest paid on the loan is tax deductible and provides a cash rebate at tax return time.
Leveraging can be done in many different ways, but the concept is always the same.
The biggest problem with borrowing money to invest is the result of a decrease in the investment's value. The returns may not be enough to pay off the interest, so more will be needed to secure the loan and the overall result is a large loan to pay off.
Hancox said that measures do exist to guarantee that leveraging can work.
"There are suitability criteria set out by the industry that your financial adviser should carefully review with you before attempting this type of strategy," Hancox stated. "Investors should fully understand the risks and be extremely cautious if considering borrowing beyond their financial means."
The New Brunswick Securities Commission has outlined the following things to consider before deciding whether to borrow for the purpose of investing.
1) Are you dealing with a reputable and registered investment adviser and firm?
2) Has your adviser reviewed the suitability criteria? Do you understand them and do you meet them?
3) What are your investment objectives? Is leveraging the only strategy that will help you to achieve them?
4) What is your risk tolerance? How much money can you afford to lose?
5) What are the fees for setting up the loan? Are there ongoing fees or fees for early withdrawal from the investment of the loan?
6) Do you fully understand the leveraging strategy? How will you make (or lose) money?
For more information about borrowing money to invest, call the New Brunswick Securities Commission at the toll free number 1-866-933-2222.
The New Brunswick Securities Commission is an independent Crown corporation which oversees capital markets in the province of New Brunswick and controls those who sell and manage securities. The commission's mandate is to protect investors from any unfair, improper or fraudulent practices, along with fostering fair and efficient confidence in capital markets. The commission receives funding from fees paid by employees of the investment industry, which includes public companies, mutual funds, and over 7,000 registered people and businesses.
Source: Communications New Brunswick
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