Should I Borrow Money from Friends?
I currently trade $12k in a margin account and see above-market returns daily. But I'm limited because I don't have the FINRA-required $25k to day trade, so I make mostly swing trades.
I have a few friends who have seen my results and are willing to collectively loan me the $13k that I need to start trading as actively as I'd like.
Would you guys take the money? I'm confident in my own abilities, but I've never been responsible for others' money before.
If I do take the money, I'd pay them back their money plus whatever returns their money generated. Does this sound fair? If so, would it make sense to pay it back in one chunk once I don't need it anymore to maintain $25k? Or should I pay them every time that I make, say $500, over $25k?
Do I need to draft up some sort of contract? We trust one another completely.
As long as you're protected from the downside scenario of losing their money, I would do it - this is a temporary thing, correct?
Personally I'd charge them a % of all profits, but eh.
Well, this is them doing me a favor, so I'm not about to charge them. I stand to make far more for myself with the interest-free use of their money. And I'd obviously rather pay them back in chunks to minimize the money I'm making for them and maximize my own.
I'm not protected from downside risk, but they would be because in a worst case scenario (my $25k is down to $13k), I can repay them with my own money and start over.
You can't with out proper licensing you can not take their money with the intent to use it for investment purposes. Key word is intent.
Would strongly advise AGAINST doing this unless it is done outside of the realms of friendship. I.e. you charge them performance fee, they accept that you may lose all of their money and are free to withdraw it at any time.
I would say it is not worth losing your friends (which could happen when - not if - you lose money) over a little bit extra. You are making enough money yourself.
His or her friends could rat him out for losing their money and get him in legal trouble. This agreement shows intent of invest his friends' money and not simply using it as leverage for his own needs.
The question is kind of half and half. On the one hand he or she will return 100% of money because it is a loan, he is not investing on behalf of the friends. On the other hands there's an expectation of the friends' earning cash based on the performance of how the funds are invested. This last part might be the questionable part.
If this really is a loan, borrow it for a year and pay the 1yr T-Bill Rate +.25bp. You can set a ceiling and a floor too.
NO! Terrible idea. Messes up your mind.
What Asatar said. Do NOT mix friends and money like this. If you had a firm set up and are accepting outside capital tell them you don't want to know if they're invested.
Don't borrow/lend money to/from friends. I lost a couple of friends after they decided not to repay me.
Do not do this
No. Back when I was good at online poker, I had a few friends offer to bankroll me. I made the smart decision to turn them down, despite the higher ROI I could've made.
i lost all my friends after i invested in a tiger during a trip to Las Vegas. i thought i'd be able to resell it to some fur traders in Mongolia but things went south when i turned down a cup of goat's milk
Suppose you lose $5,000 on your first trade (or even $1,000). Now you're back under the $25,000 threshold and can't daytrade. Not a good idea for too many reasons to count.
Undercapitalization is a killer in this business. Not to mention the illegality of what you propose and how it could potentially keep you from ever being licensed in this business.
Why not borrow your friends gfs while your at it. Let me know how that goes.
Neither a borrower nor a lender be, for a loan oft loses both itself and friends.
So the negative consensus seems to be stemming from the following:
Legality: I have not looked into any kind of licensing and didn't know that using borrowed money to trade was illegal. Could somebody provide a source on this so that I could read about it? Can I set up an LLC, structure it as an investment company, and accept external investments? Or would I still need to become licensed? And licensed as what? What would this entail?
Friendship: I don't see how our friendships would be hurt as long as the fund doesn't dip below what they loaned me and I'm able to repay them.
Edmundo: That's a good point. I could lose money in the short-run. But I've been making consistent gains so far, so even if the fund dips below $25k, I can still swing trade and do decently doing that until it's over again. I realize that there's risk involved in trading and even more risk involved in trading OPM. I'm willing to accept it.
You are seriously underestimating the likelihood of this happening. How long have you been trading for? What kind of market environments have you seen? Have you only traded bull markets? What has been your maximum drawdown?
Only liars and frauds avoid drawdowns forever. It WILL happen.
EDIT: Reread what you wrote - this means that you are essentially absorbing all the losses first, and yet you don't plan to charge them any kind of performance fees? I'm struggling to see what the huge benefit in this is for you...
You would be acting as an agent of their money, and therefore you have legal responsibility to safe guard their money. This requires FINRA and SEC licensing and proper legal set up a company in some format. You can set up a firm that others buy into and invest that way however you have different guidelines and more paperwork and legal fees that make the benefit pointless.
if you got under 15 investors, it is fairly easy to structure through your broker... Interactive brokers and many others such as TS offer setups for this
That said you should list max drawdown and also how long you been trading for.....
Point of matter is some are more careful with others money others are less caring. Changes things with friends based on performance and may exert extra pressure on you and affect you in ways that it didnt before. Lose money now(losing friends money) so may act differently than just losing your own. In general the rule of thumb is dont trade what you can't afford to lose or have yourself to lose.
How do you know if you are profitable day trader if you are a current swing trader? You may find yourself into more trades that lower % of winning trades.
I see what you guys are saying.
My alternative is to keep swing trading, which is profitable but not as profitable, until I have $25k. That probably wouldn't be for another maybe six months.
Is that what you'd recommend? Do you see any other alternatives?
100% do not do this, it will not end well. Not to mention, your trading performance may actually go down once you are able to day trade.
Somebody flag this for a follow-up two years down the road... let's see how well he "predicts" a massive market correction... everyone is a stock-picker in a bull market...
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