How to Invest in Small-Cap Stocks Using Borrowed Money

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If you are new to small-cap stocks, you might find it overwhelming to see that there are a lot of technicalities in this industry.

First, the term 'small-cap stocks' refers to shares with a small market capitalization that is usually worth $250 million to $2 billion. Those below the line of $250 million are called micro-caps, while those below $50 million are called nano-caps.

Although these categorizations might be straightforward, try to remember that the stock exchange is continuously fluctuating. That means the value of a share would be changing over time. However, these thresholds that categorize the market capitalization of a stock is usually the general rule of thumb in the industry.

Why consider small-cap stocks?

Before we venture into how to invest in small-cap stocks, it is worth noting the factors as to why you should consider it in the first place.

Netflix, Home Depot, and Microsoft started as small-cap stocks in the past. This means that most successful large companies have started as a small business that had their profits ballooning over time.

Small-caps allows the investor to get on the groundwork with new service providers and products that might get big in the future. Had you possessed the insight of a good investor while these resources have just started, you might find yourself having your commitment made into substantial profits.

One more thing about small-caps stocks is that most mutual funds don't invest in them too much. To buy a prominent enough position in the exchange, small-cap stocks need to have adequate funding. With the help of mutual funds, small-cap stocks can buy a place to make a difference in the trade.

However, SEC has strict regulations about mutual funds, restricting them from having access to all small-cap funds in the exchange. Because of this, individual investors will have a chance to pick their own company that they think will make it big in the future.

How to invest using a loan?

Through a small taxable brokerage account, you can purchase an individual small-cap stock.

If you have the money, you can invest in a mutual fund with other investors, index funds, or exchange-traded funds that focus on small companies. If you don't have much money on you, you can apply for a loan from your trusted lender.

If you want to borrow to invest in small-cap stocks, there are tips you can follow to ensure little to no losses.

Find a Loan

By shopping around and seeing different lending options, you can see that there are some loans that can be used to invest in small-cap stocks. Some loans like margin loans will enable you to borrow money to invest in exchange-traded funds and shares.

However, you need to lower your loan-to-value ratio to avoid your lender selling some of your investments to lower the ratio. Take note that your LVR will go up if your shares go down in value or your loan is getting bigger. If this happens, you will get a margin call and will be notified to lower your LVR in the next 24 hours.

Also, if you have a poor credit score, you can opt for subprime lending. One of the benefits of subprime lending is that it can approve you for a loan albeit having a bad credit score. 

If you are into investing in properties, you can get an investment property loan. With this loan, you can invest in a plethora of properties like lands, apartments, commercial buildings, and houses.

Avoid Maximizing your Borrowing Limit

If you manage to pick a loan that you think will best fit in your investments, try not to get the maximum borrowing amount. Take note, the bigger amount you borrow, the bigger interest you will pay and the harder the repayment terms will be.

Not to mention, that if you fail the repayment terms, losses will ensue and you will lose most of your investments. To avoid getting your loan grow over time, always pay the interest on time.

Always Pay the Interest

Another thing you can do to pay the interest always in time is you can set up an emergency fund in case you fail in acquiring the money you have to pay for the interest. For you to avoid selling your investments to pay for the loan, an emergency fund will save you in this time of need.

Set a Budget for Investing

The price for an individual stock varies on how much is the value of that specific share. If you want to invest your loan on a mutual fund, share prices can start as small as a few dollars and up to a few thousand dollars. If you opt to do this, the share will have a significant position in the exchange, that will potentially lead to bigger profits.

Takeaway

The most significant edge of small-cap stocks over large ones is their potential for growth. Merging and acquisition of small-cap stocks by large companies are very common and are a considerable opportunity for small-cap investors. This is done by large companies to enter a new market or gain intellectual properties that can prove beneficial for the future of their company. Also, because of this, the pricing of small-cap stocks increase massively in value.