By Godfrey Kenneth Gobba
What if you could borrow a hundred million bucks from your bank, invest it in the Stock Market and double your money in two months? What if you could borrow a billion bucks from your bank, invest it in Bonds or Treasury Bills and earn hundreds of millions in interest?
If bonds and treasury bills are truly risk free investments with no possibility of loss, why not borrow as much as you can and invest in them as much as you can, for maximum profit? Is it possible to borrow huge sums of money to invest in financial assets?
And if it is, should you do it?
Borrowing money to invest in financial assets is a concept we know as leveraging. For example, if you had only one million shillings of your own money, leverage of 1:20 would mean that your bank lent you 20 million, 20 times your initial capital, which now gives you 21 million that you can use to invest.
Even if you initially put up only one million of your own money, you would earn and take home profits on the entire 21 million. So leverage can indeed magnify your profit potential, but it can also brutally assassinate you if your position or investment goes against you.
In developed financial markets like in the United States, the use of leverage when buying and selling financial assets is very legal and acceptable. However, in developing financial markets like in Uganda, no bank in its right mind would lend you money to invest in the Stock Market or even in risk free financial assets like government securities.
You could of course resort to borrowing from a money lender who could demand that you pay them interest on a monthly schedule. But this wouldn’t work for you because bonds pay interest semi- annually and treasury bills give returns only at maturity.
Government securities pay some descent returns in the range of 13% to 18% per annum, but that is what most money lenders charge per month.
So even if you somehow managed to convince a money lender to finance your bond or Treasury bill purchases, you would have a pretty hard time meeting the loan shark’s interest demands and if they agreed to lend you money to invest in the stock market, then they are probably in the wrong business.
So can you borrow money to invest in financial assets in Uganda? The short answer is no. Can you borrow money to invest or trade in financial assets elsewhere? The short answer is yes. If you wanted to trade forex, commodities or indices through an online broker, you would have access to insane amounts of leverage usually up to 1:500.
I have met several people who have expressed the desire to borrow huge sums of money and then invest it in Stocks, Treasury bills and bonds. If you too have been toying around with the same idea, you should know that it is not applicable in Uganda’s financial markets.
And even if it was possible to borrow to invest in Uganda’s financial assets, it would be a bad idea for the ordinary investor. So instead of thinking of how to borrow billions to invest in government securities, you should focus on intelligently investing the little savings you have now.
Slowly invest the little you have, do it consistently and regularly, re-invest your returns to enable the magic of compounding and eventually you will amass a sizeable investment portfolio.
Rome wasn’t built in one day you know!
The author is CEO, African Investor Academy
