Banks make their profits off of the deposits made to them from individuals and other businesses, then they loan those deposits out at a higher rate – and keep the difference in profit for themselves. For instance, an individual deposits $5,000 in an online bank retailer and receives 4% in interest from the bank in a savings account. That $5,000 deposited doesn’t stay in some safe until the individual withdraws, but rather the bank loans the $5,000 out at maybe 10%...and the bank keeps the 6% profit it made off of that money. Well, I decided to play by the same rules of the bank but with my brokerage firm – I can get approved for loans from my brokerage at 6.5% APR (in order to get a good rate like this you need good credit and collateral, i.e. my investment portfolio) and I used this loan to buy stocks that pays me dividends at 12% APR. And I KEEP the difference!
In other words,
1. I borrow money from my brokererage at a low rate of 6.5%
2. I loan this money to a company at a higher rate of 12% in which I receive stocks and dividends
3. Then I pay my brokerage their 6.5%
4. I keep the remaining 5.5% profit.
And if the price of my stock goes up - then I keep all capital gains.
So without using any money of my own – I create a profit for me playing by the rules of the bank, which is to make a profit for yourself without using any money of your own. Just take a look at the scenario between Goldman Sachs and taxpayer money!