Investing in the Tech Industry

stringsThe Canadian technology industry has skyrocketed in recent years, surprisingly in stark contrast to the slumping economy. Tech stocks have outgrown all other industries in the Toronto Stock Exchange, and the value of all these stocks amount to a whopping $250 billion. There’s no doubt that Canada’s tech industry is on the rise and is presenting potential investors with amazing opportunities. In addition, Canada’s traditional natural resources industries are still struggling to survive after the recession. Therefore, some investors have no choice but to put their money into the booming tech industry.

Investing in the Tech Industry

Unlike in the past, Canada’s tech industry is powered by a slew of start-ups, the numbers of which grow day by day. Because there are so many start-ups, the number of venture capital firms in Canada has also grown to fund these ambitious projects. For the average investor, however, it’s difficult to get involved with a venture capital fund to invest in a promising tech start-up.

There are three ways the average Canadian can invest in the tech industry: buy tech company stocks using personal funds, donate in return for shares on a crowdfunding project for a start-up, or to directly funnel money into the launch of a new start-up. Whether you decide to become a primary investor or to buy stocks, you will need a good amount of capital to begin.

The initial investment for a tech start-up can vary, but some can require up to $10 million in initial capital. This is a hard number to reach for the common investor. Normally, most casual investors do not have funds this large. Therefore, most average persons who want to invest in tech start-ups end up borrowing money.

How to Borrow for Tech Investments

There are two popular ways to borrow money to invest in tech companies:

HELOC—Often referred to as a second mortgage, HELOCs allow homeowners to borrow money against the value of their home. Borrowers can become eligible for up to $100,000 or more home equity line of credit. Borrowers can take out an amount monthly, like with a credit card, but for a period of time. The borrower needs to repay the entire amount due when this time limit is up. See list. Because borrowers don’t have to repay a HELOC on a monthly basis, they can invest the HELOC funds and repay the initial loan with the returns.

Credit Card—Credit card is another popular and convenient method to borrow money for investments.  While they won’t allow large sums to invest directly in a start-up, credit card funds can be used for small investments. For example, borrowers can buy stocks each month, as long as there are returns the following month. Borrowers must be aware that credit cards come with high interest rates, so this option is only recommended for those with a sufficient existing income to pay the credit card bills each month. See list.

When borrowing money, it’s very important to weigh the value of the amount borrowed against the returns. Otherwise, borrowers will only sink further into debt.

Is Borrowing to Invest Wise?

Borrowing money to invest in a venture is not new. People conventionally borrow money to buy property and to invest in the real estate market. However, borrowing money to buy stocks is seen as a risky venture.

When an investor borrows the capital, it’s called leverage. To profit from the leverage, the returns from investments must exceed the amount due including the interest rate. Considering the volatility of the markets, borrowing money to invest in anything is obviously risky.

While this risk is a prominent con, there are many benefits to borrowing money to invest in tech companies too. Borrowing money can pave the way for young investors to enter the tech industry, as sources of funding are severely limited for this group. Investors who are short of cash right now, but will have enough income later, can borrow money and invest without having to pass up on a good opportunity.

Borrowing money for investing is not generally recommended for those who are currently in debt. If you do so, the returns from the investment must exceed the balance plus interest for your entire debt, not just the amount you borrow.

 

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