How to use OTHER’S money for your Wealth Creation?

 29^th September 2020

How to use OTHER’S money for your Wealth Creation?

Namaste! The most sought after and most talked-about word is LOAN nowadays. We have loans for N number of purposes. We will focus on Loan or Other’s Money from only Wealth Creation purpose in this post.

As a Buffett disciple – I am against the loan for investing in shares. We have seen what has happened to the companies who have taken big loans for businesses and they have to sell their companies at throwaway prices when their business failed. Buffett has experience of 70 plus years and his advice is the ultimate advice you have followed as far as loans for stocks is concerned.

However, I will share some of the ways – if you are okay with that – you may use them and make tons of money with other’s money. Let me make it clear that this is a 2-edged sword and you will have to be very shrewd to use them.

IPO Loan: -

This is relatively the least risky way to take a loan for IPO applications. You invest 1% and 99% is invested by the financiers. In the recent IPO of Route Mobile – HNI made an application for Rs.40 Crs by investing Rs.40 lakhs. They got an allotment of 5900 shares, approx. 20 lakhs. Those who applied for Rs.40 lakhs single applications got just 40-80 shares. However, this was not FREE. They paid Rs.102 per share as an interest to the financier. Their cost was Rs.452 (Rs350+Rs102). They sold at Rs.700 to Rs.900. They doubled their money in just 7 days on their allotment of Rs.20 lakhs.

This may look attractive when you read the above – but when the IPO fails – the stocks are allotted and you have to pay for the balance money. Many times, IPOs are not listed at super-duper listing like Happy Mind and Route and the investor has to face the music for the same. Many guys are still holding shares of Ujiivan Small Finance Bank IPO came in 2019 like this.

Margin Funding or Loan against Shares: -

Say you have Rs.1 Cr worth of stocks as of today. You take a loan against them at Rs.50 lakh and invest in new shares. When the market is moving up one side – this may give you a very good return. But when the market turns negative or becomes volatile – you will lose your sleep. We don’t recommend this to the Masses.

Loan against property or personal loans: -

These are a very risky proposition for Masses and I would not recommend it to them.

Profit-Sharing Deals: -

Say somebody is having money and he does not want to invest. He has kept his money in Bank FD. You can ask him to buy shares you like and hold in his DEMAT account. Make a condition that he will not sell without your knowledge. You give him 25% of profit or 10% of yearly interest whichever is higher. This can be done with the person whom you trust and who trust you in return.

The beauty of this way is – you can hold your shares in his account so no need to give security. He is getting 6.5% taxable interest in his account, assuming he is a senior citizen. You are giving him TAX FREE 10% or 25% of profit whichever is higher. This is the best deal for him.

Today bank rates are very low and this can be a very attractive source of money for long-term investments.

The only problem is – how will you compensate the senior guys in case of loss and many times the senior guys will sell the shares and will not give you the money. In both the case – you need a strong TRUST in each other to do this.

This is the best way to make tons of money when you are 100% sure about your investment idea.

Taking shares on loan and selling them: -

This is another way to make money. In India, many brokers are providing SLBM – stock lending and borrowing facility. Say you feel that ABC will go down from Rs.30 to Rs.15 in the coming 6 months. You can borrow ABC from the exchange and sell it in the market. When the prices come to Rs.15 you buy your sold shares and give it back to the exchange.

The people who lend you shares – will get interested the way you pay on loans. 

Shrewd people make tons of money on this. This is also not for the Masses. But Masses can make good money by lending their long-term stocks to the exchange and earn interest on the same along with the dividend. Say you want to hold Reliance for the long term. Now, somebody wants to sell it. You can lend Reliance to him through exchange and you will get interested for the same. Since the transaction is done through exchange – you are 100% safe either way.

However, the risk remains if you have sold and prices do not move down.

What is my personal experience?

Above all are really very good ways to make money on somebody’s money. But Masses do not want to learn investing in details. Taking a loan and buying stock is playing with fire. Those who are not trained in investments are not fit to play with the FIRE. I have seen many guys selling their gold/house to pay for the losses.

I have personally used many of the above options from time to time for a limited period and I have got my own success and failures depending on the market movements. My favorite is profit-sharing deals.

What Now?

When you invest your own money – your loss is limited to your capital only. But when you invest Loan money and lose – you will have to earn that money along with the interest to pay back. So, be extra careful, if you want to use any of the above ways for making money.

Remember – No Pain – No Gain.

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Live With Passion…Invest With Passion.

 

Hitesh Parikh.