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Financing shares through debt

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Contributor
I have just purchased a new house and sold the old one. I have taken out a bond on the new property at prime minus 1. I am thinking of utilising some of the proceeds of the sale to purchase new shares and a vechile rather than settling the bond. A bit of backround info....... i am currently completing my articles. hopefully if all goes well i should be a C.A next year this time. The logic behind this decision is that i hope to benefit from the time value of money on the investments and yield a greater return than the costs to maintain the loan. I do intend to pay of the loan ASAP once i qualify as a C.A..... Any thoughts would be welcome......
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26 REPLIES 26
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Primary res? Pay it off..... you cannot use the interest to deduct and other "running expenses". Buy to let property, keep the bond maxed out to get benefit of interest on tax etc. Buying a new car? loose 30% the minute you sign for it. Buy a good demo model with balance of warrantee etc. Time value of money in the case will not outstrip value of compound interest. IMO.

Rather pay of personal debt then start investing with after tax money debt free.
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BTW, IMO being a CA does not mean you know about money....my sister is a highly qualified CA and has more debt than I could care to imagine...and not good debt either. I however live debt free, except for a few investment properties etc that have "good debt"
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Wooooosssshhhh- CPS, who made you angry today?
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Its Friday (that caught me off guard when I woke up as I was certain it was Thursday???) so I don't get angry on Fridays. I like to enjoy my week-ends and besides your comment on being honest in HG post rings true. Who the heck finances shares through debt....mind you dont answer that I know the answer ;-)
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Valued Contributor
everybody who trades a derivative finances shares via debt ..
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Super Contributor
If you are new to this then leave leverage alone. If you must trade on tick, look into instalments. If yuo are determined to use your bonnd, then you must restrict your purchases to shares with a good dividend to carry your interest cost on the input side AND only buy high-grade cheap issues. IMO
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Do the SUMS... It is insane to take out an bond, and use the money to invest in shares and car. Car depreciates 20% the day you take it. If you do the sums, you will see on your house the interest payment is typically 3X the loan amount. Bottom line pay off your bond asap, unless you have inside info on a share about to take off
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Valued Contributor
well the sums are that over the longer term the JSE out preform the prime rate ..
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Super Contributor
Simon, I am sure you are not advocating buying a car with money from housebond
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Valued Contributor
no, read what I wrote ..
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Its the same as financing any investment. The goal is to make more than the cost of the finance. Seems like the soon to be CA is thinking like a future wealthy person.
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You should have capital available to cover the entire position. If it goes pear shaped then you are seriously going to need that bond access facility ;-)
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BUT does it take into account compounding interest on debt?
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Yes, but the debt is personal and you cannot use it to tax advantages so you need to pay it down before you invest. If he were approaching it from a "business" investment then yes the cost vs gain argument hold water.
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Super Contributor
1. Don't buy a car with Bond money. 2. Only invest in non-derivatives such as shares ETF, ETN's etc (remember you are already geared via house bond). 3. Diversify a bit.
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i beg to differ with CPS... as i wasnt trying to imply i understand money because of the qualification that i wish to achieve. my point was that i will be able to pay of the debt quickly...not over the usual term of a bond ( which whne then work out to be expensive) and there are no highly qualified C.A's....... maybe some have more experience than others. in any case i think that we are at a distinct advantage when analysing financials as we are the very people who draw them up
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Super Contributor
if you are trading and you lend the money from your bond to trade you can deduct the interest for tax purposes as the loan interest would be in the production of income S11(a) you would of course have to keep record of the "loan" from bond to trading account.If you have the confidence that you will do better than your bond interest approx 10% i assume, there is absolutely nothing wrong with using your bond.If you have a good system you should at least return 30% p.a. for less than that i do not know that it is worth it IMO
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El Nino, I hear what your are saying, but your statement of reading financials due to being a CA is a better advantage than most everyone else due to you guys drawing them up....I disagree, you can only draw up with what information you have at your disposal. Its the information that is not there that is more important than the facts on PAST performance.

2 years ago every CA and the likes would never have seen the markets doing what they did. Heck even my "financial guru" (whom I seldom listened to anyway) was advising me to invest in more properties and diversify into stocks etc plus the usual off-shore shyt (de-worse-ify in my opinion). Needless to say he no longer advises me as I refused to take his opinion. Running my own companies I started seeing the markets changing about 18 months before the worst actually came to roost.

However the debate is not over qualification as you pointed out, but the opinions are still the same. It's your choice as its your money and when you come back in a years time and tell us how your plan worked out we can talk again. Personal debt is never a good thing to have if you are investing/trading. Period.
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Makes perfect sense to use your bond to finance shares. I have been doing this for years, as I am not a big fan of property as an investment (please guys I don't want to start the ol' property investment debate). It is the equivalent of using derivatives (much cheaper!) but has the advantage that you can hold the position long term. If you borrow against the bond to buy a share, your interest is calculated on the initial purchase price. If you use derivatives, the interest is calculated daily on the total exposure (hence the short term nature). So it is quite conceivable that a good quality bluechip share can generated dividends that will eventually cover your bond repayments. In my case, redefine is generating greater returns (after tax even!) than the portion of bond repayments. Grindrod is getting there and Remgro is about 10% short. The capital growth on each has way outstripped the borrowing costs though. My personal advise, high yield stocks only! Don't go for small caps. You want to mimic a buy-to-let strategy (minus the buying costs, tennant hassles, maintenance, lack of liquidity, blah,blah,blah). The purpose is to get the yields to grow to a point where the bond repayments are covered.
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