-Capital- (Part 2)

I think my previous post is not explaining enough about capital. So, i decided to elaborate more about it in this post.

In investment world, there are actually 2 types of capital, one which we use our OWN money and the other one which we use OTHER PEOPLE'S money. Other people's money may include banker's money(loan) and also public's money(listed companies). It is the ultimate intention of any investor to be able to invest using other people's money and to reap profits without using their own money.

In fact, we can see in a lot of situations where it is possible to use other people's money for investments, especially in real estate investments where the investor only needs to put around 10% of his own money, and the bank will cover the rest. When the real estate is being rented, the owner(investor) will use other people's money(rental payment by tenants) to settle the loan repayment. Most of the investor also enjoy positive cash flow from it too, when the rental payment is higher than the monthly payment of the loan.

However, it is not advised for an investor in the stock market to follow this strategy, simply because it is a different ball game from real estate. The volatility and uncertainty of the market movement is simply too risky for any investor to use borrowed money in the stock market.

Stock market can move in either direction just within a short period of time. So, investors who 'gamble' in the stock market using other people's money will have a difficult time if their investment is not as profitable so as to settle the debt. During the last economic downturn, we see a lot of people got stuck in heavy debts because they use borrowed money to invest in the stock market. We even heard people committing suicides because of this.

Remember, it is the cardinal rule of stock investment not to invest using borrowed money. It will only bring more harm than benefit.
Do not ever borrow money to invest. It's safer to use our own money, even if it takes a lot of time to accumulate our capital. I assure you, it's well worth it!

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