#WealthManagement #StockPortfolio #BorrowingAgainstStocks
Hey everyone! 👋 Let’s dive into an interesting topic today – borrowing against your stock portfolio! 📈💰 Ever wonder what happens if those high-flying stocks take a nosedive? Here’s a question for you: What are the implications when your borrowed millions suddenly turn into thousands? 😱
Let’s break it down:
– When billionaires borrow against their portfolios, they use their stocks as collateral to secure loans and avoid hefty capital gains taxes 🤯
– But what if the value of those stocks plummets and your loan amount far exceeds your portfolio’s worth? 🤔
– The implications can be significant, with potential risks of defaulting on the loan and losing valuable assets
One possible solution to mitigate this risk could be to have a diversified portfolio, including assets beyond just stocks. This way, if one investment tanks, you have others to fall back on. 💡
What are your thoughts on this practice? Have you ever considered borrowing against your stock portfolio? Let’s discuss! 💬 #FinancialPlanning #InvestmentStrategies
if you can’t service the debt, you get into strife and you’d have to start selling stuff.
Unclear how borrowing reduces taxable capital gains.
They’ll only be able to borrow against a small part of their portfolio, say 20%. Therefore the stocks could tumble 80% and they’d still be ok.
Lol, like the royals. “We dont carry cash, so you shouldnt rob us!” They have cash. They just dont want to advertise it.
Like saying “Im very rich but Im leaving nothing to my kids so they have to fend for themselves”. Yup, Id tell that to the world too just after I sign the docs to leave them well looked after in the private wills.
Rich have line of credits they can access for everything from yachts, jets, to holiday houses and cars etc.
Borrowing against the shares stops the individual from having to pay any form of tax.
In this instance they pay absolutely zero income tax on their borrowings. It’s ordinarily interest only and they keep spinning the loan around at term to fund their lifestyle.
As long as they can make the repayments they’ll be fine. If not, declare bankruptcy and start all over again.
If the stock is worth less than the loan then as part of the agreement with the bank you get collateral called, forcing you to sell in order to pay back the loan.
This is exactly how the wealthy lose lots of money very quickly during times of credit crisis unless the government starts bailing everything out.
This is only really an issue since 2008 when the interest rate becomes ultra low. I also suspect that the growing amount of passive investment have largely support the lofty equity price. Otherwise this type of borrowing against portfolio is very dangerous and highly leveraged.
Not just billionaires. Lots of small time investors borrow against the portfolio to buy more.
Too much leverage, they lose the lot. Even billionaires.
This is called a margin loan. As long as they can make the necessary payments, nothing happens. However, if the price of the stock drops below a pre-agreed level, more money needs to be paid to maintain the loan. If they can’t make these payments, the bank will sell the shares to recover the money they are owed. Regardless of if the stock is being sold at a loss from the perspective of the owner.
As one of the many billionaires on Ausfinance, is this some kind of peasant question that I’m too rich to understand?
Stocks don’t drop in a day. And they might be required to have a range of stocks as collateral.
>My question is, what would be the implications if those stocks took a tumble and you had a loan for $50 Million and your theoretical “wealth” dropped to a value of $5 Million. How does that work?
It depends on the arrangement the borrower has with the bank. In Australia most people who borrow to buy shares or ETFs use margin loans. Margin loans have a loan to value ratio at which the system automatically starts selling off shares. Usually this is a LVR of about 80% at which the system starts selling off shares thereby paying off the loan and reducing the LVR.
However there are home loan style loans eg NAB Equity Builder where you pay a fixed amount every month regardless of the value of the shares or ETF.
Margin call
This sweater explains…
https://x.com/SamFishell/status/1609021394800762882?lang=en