Coal India- Part II
A dear friend called me from
Now his logic was if the Coal India IPO is such a wonderful thing that definitely he is going to make more than the 15% he is paying to the bank on the interest rate.
Without going to go into too many calculations here are my arguments against taking a personal loan to apply for an IPO:
- IPO is a lottery you are not sure how many stocks you will get in the allotment.
- The more successful and IPO the less your chances of getting a higher number of shares as the pie will be divided amongst more number of applicants.
- There is no guarantee that just because more number of applications has come you will make money out of the IPO. Just remember the Reliance Power IPO which was highly oversubscribed but still investors ended loosing money.
- The listing gains are fully taxable if sold before a year and you will not get a deduction for the interest that you pay to the bank for the application money as it is a personal loan and not a business loan. ( Comments needed on this belief)
- But the biggest reason I am against taking a loan for applying for an IPO is that in principle I am against taking debt to play in stock markets. As the markets are highly volatile and can swing either way in a very short time. You don’t want to be caught in a situation when you have taken a loan to buy stocks and the price drops substantially. So now you are stuck with a stock that is below your acquisition price and you have a loan to pay for.
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