It only makes sense to borrow money for what is known in financial parlance as “investing a loan” when the return on the loan is high and the risk of the investment is low. It is not advisable for an investor to invest a loan in a risky instrument such as the stock market or derivatives.
Even if an investor takes out a loan, it does not make sense to invest the money in an investment that will mature after the loan matures. It is also important for the investor to ensure that the return on investment is higher than the cost of borrowing.
Certificates of Deposit (CD) and bonds fall into this category, as do investments that mature in 90 months or less and yield more than 10% of the cost of borrowing.
A solid understanding of how and when leverage and margin come into play can also help an investor answer this question.
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