Buying Stocks On Margin Is A Bad Idea: You Could Easily Lose Everything

In general, buying stocks on margin is a bad idea. You could lose all your initial investment if the stock suddenly drops and you have no way to meet your margin call. In addition, you are already paying a margin interest rate.

However, the idea of buying stocks on margin has increased due to a long bull market and a drop in interest rates. More people are trying to get rich as quickly as possible thanks to what we see and hear on the internet.

Unfortunately, bull markets end and the people without a proper asset allocation discipline are left holding the bag. I've seen people lose tons of money, time and time again, since I began investing in 1995. It's so sad, and it doesn't have to be if more people were disciplined by not investing on margin.

Let's quickly review why buying stocks on margin is a suboptimal move. We'll then go through some terminology, a couple of margin-buying examples, and the dreaded margin call.

Why Buying Stocks On Margin Is A Bad Idea

Here are six reasons I don't recommend buying stocks on margin.

1) You become an active investor.

If you buy stocks on margin, this means you are speculating as an active investor. We already know that over the long run, active investors perform horribly compared to passive index investors.

It's OK to invest a minority portion of your assets in individual stocks to find the next multi-bagger winner. However, unless you are a professional investor, chances are high you will underperform because even most professional investors underperform.

Active and passive investing - buying stocks on margin is a bad idea

2) Magnifying underperformance.

Given active investors tend to underperform, buying stocks on margin means an investor is magnifying their underperformance by going into debt to buy stocks.

Using margin to buy stocks when stocks are going up works well until it doesn't. The average investor tends to be too emotional for his or her own good.

3) Going on margin costs money.

Not only is buying stocks on margin likely magnifying your underperformance, there's a borrowing cost associated with going on margin. The cost to go on margin can range anywhere between 2% – 8% on average, despite the Fed Funds rate and the 10-year bond yield at a low level.

Therefore, the main people or institutions who are in favor of investing on margin are the brokers or brokerage firms who earn interest off your margin debt.

This financial institutions also like offering Home Equity Lines Of Credit (HELOC) and Stock-Based Lines Of Credit (SBLOC) in order to make more money. Just be careful not to borrow or pay too much.

Here is an example of margin interest rates by Fidelity. Talk about an expensive ripoff!

buying stock on margin cost

4) You may get more emotional (stressed).

Given your gains and losses are amplified when you buy stocks on margin, you might become an emotional wreck during particularly volatile days. Your mood swings may negatively affect your relationships with your partner and children.

Taking out your frustrations on innocent loved ones is one of the worst things an investor can do. It's already difficult to compartmentalize a bad day at work with your home life. It's practically impossible if you have a bad day at work and a bad day in the market on margin.

If you don't get a sense of joy when your stocks go up during good times, you will feel the pain of losing money much more during bad times.

5) You might be forced to sell your position at the worst time.

If you buy stocks on margin instead of with 100% cash, your positions are at the mercy of the brokerage that lends you money.

To maintain your margin amount, brokerage firms require a minimum amount of collateral value. If your stocks tank like back in March 2020 when the S&P fell by 32%, your brokerage firm may issue a margin call.

And if you can't come up with additional capital, your brokerage firm will sell your stocks to meet the minimum collateral requirement.

6) You may ultimately lose time

Losing lots of money after buying stocks on margin is one thing. But losing time is another. If you lose lots of money buying stocks on margin, you are ultimately losing valuable time. The older you get, the more valuable time gets because you have less of it.

Having to work one, three, five, ten more years to make up for your stock losses is atrocious. It may depress you and negatively affect other areas of your life.

The Desire To Buy Stocks On Margin Was At An All-Time High

Even after I've made the case that buying stocks on margin is a bad idea, it's good to learn how margin works. Because I know some of you will buy stocks on margin anyway.

Let me share an example. My friend makes roughly $70,000 a year. He helped me get into Tesla stock in 2018, which I am grateful for. Tesla has been one of the best growth stocks of our time.  

As we got to discussing the future of Tesla one day, he revealed to me he bought more stock on margin. Given the rise in Tesla stock, I thought he had about a $250,000 position in Tesla, which was already a lot based on his income. 

When I asked him how many shares he owned now, he said, “Over 1,000!” In other words, at one point, he had about $900,000 worth of Tesla stock!  

I'm not sure how he keeps getting new funds or how much he can borrow from his brokerage account. However, he did say he “only has to pay a 7% interest rate on his margin.” 

Stubborn Investor Buying Stock On Margin

No matter how hard I try to encourage him to de-leverage, he won't. He's adamant Tesla will continue to fly to the moon (I hope so). He needs to get rich. At 38, he wants to achieve financial freedom now!  

Meanwhile, the stock crashed from its 2021 high. But on margin, his decline may temporarily be closer to negative 60%. Losing $250,000+ on paper seems like a lot for someone who only makes ~$70,000 a year. We’re both hoping Tesla bounces back as I was down about $55,000 at one point too. But I'm not on margin.

When I asked him what next, he responded, “We've seen worse corrections before. I'm buying more!”

He truly has “diamond hands.” I’m impressed with his conviction, which is what it takes to get rich.

Investing FOMO is the most difficult type of FOMO to overcome. Unfortunately, I'm sure many retail investors are margined-up. And when the great unwind comes, it is going to be FUGLY!  

A year later, Tesla stock is down 70% and my softball friend has lost hundreds of thousands of dollars. Yet, losing all his money on margin isn't the worst thing.

Why Buying Stocks On Margin Is A Bad Idea

Unfortunately, by the end of 2022, my friend has lost over $400,000 in Tesla stock because he bought on margin. He severely underestimated his risk tolerance, especially with the birth of their first child in 2022. He will now have to spend another 4-5 years working and saving to make up for his losses.

How Does Margin Investing Work?

Just like a bank can lend you money if you have equity in your house, your brokerage firm can lend you money against the value of certain stocks, bonds, and mutual funds in your portfolio.

That borrowed money is called a margin loan. The margin loan can be used to purchase additional securities or to meet short-term lending needs not related to investing.

In my friend's case, he decided to go on margin to buy more of one stock that already takes up a 90% weighting in his entire portfolio. Going on margin to buy a stock is one thing. Going on margin to buy more stock that already dominates your net worth is another level of dangerous.

When we discuss going on margin, this is only for your taxable brokerage accounts. You can’t borrow funds in retirement accounts or custodial accounts.

The main reason why is because the government ALSO doesn't want you to blow yourself up. Margin investing is not risk-appropriate for your financial future.

How Much Can You Margin?

In general, after signing a margin agreement, a brokerage customer can borrow up to 50% of the purchase price of marginable investments. When people say they are on 50% margin, it actually means they've purchased double their cash buying power in stocks.

The 50% margin terminology can be confusing, so let me share with you an easy example.

Let's say you have $100,000 in cash in a margin-approved brokerage account. Your margin agreement says you can borrow up to 50% of the purchase price of marginable investments. You love Apple stock and want to buy more than a $100,000 position.

The margin agreement says you can buy up to $200,000 in Apple stock – you would pay 50% of the purchase price and your brokerage firm would loan you the other 50%. This is where the 50% comes in.

Being able to invest 50% on margin actually means you have double the cash-buying power in your brokerage account. You have a 2:1 margin.

The amount you can borrow (margin) changes every day because the value of your marginable securities as collateral fluctuates daily. Therefore, don't just assume you have X amount of buying power. Check first before making an investment.

If you run your margin limit to the maximum, a decline in your portfolio's value will decrease your margin buying power and vice versa. Please don't buy stocks on margin and also day trade as well. This combination is a high probability you will lose a lot of money.

The Parallel To Using A Mortgage To Buy A Home

The 50% margin figure is like having a 50% loan-to-value ratio when buying a home.

Isn't it funny how it's totally acceptable for people to buy a house with up to an 80% loan-to-value ratio (20% down, 80% loan)? Whereas, when it comes to buying stocks on margin, it's considered much riskier.

Understanding this difference is important for understanding risk and how you want to construct your net worth allocation.

If the government prohibits retirement accounts from using margin, online brokerage accounts limit margin investing to 50%, and the government encourages only 0% – 3% down payments for first-time home buyers, we can conclude real estate is a less risky asset class.

It is unlikely that a property's value will decline by 32% in a month like the S&P 500 did in March 2020. During that month, you can bet your bottom dollar that plenty of investors on 50% margin either received margin calls or were forced to sell some of their margined positions. If margin investors didn't get back in, they are crying now for missing out on a huge rebound.

On the other hand, if real estate investors kept paying their fixed mortgage payments each month, nothing happened. Further, a tangible asset like real estate outperformed when stocks were getting crushed.

More On Margin Interest

Buying the S&P 500 index on margin is a more risk-appropriate investment than buying single stocks on margin. However, even still, if it costs 2%+ year to go on margin, the investment arbitrage is difficult. However, if it cost <2% to go on margin, there would be a surge in margin investing.

Margin interest cost is what keeps the most risk-loving investors in check. Margin interest rates are almost always lower than credit cards and unsecured personal loans. However, that doesn't mean margin interest rates are low.

Even in a low-interest rate environment as we are in today, margin interest rates are usually between 2% – 8%. And if interest rates start going up, margin interest rates will go up as well.

There’s no set repayment schedule with a margin loan. Monthly interest charges accrue to your account. You can repay the principal whenever you wish. Also, margin interest may be tax-deductible if you use the margin to purchase taxable investments and you itemize your deductions.

How Margin Can Boost Returns

Investors buy stocks on margin to try and boost returns. Margin investors are so certain of a stock's potential that they are willing to go into debt to try and earn a return much greater than the margin interest rate.

Let's say you use $100,000 to buy 10,000 shares of a $10 stock. A year later, the stock rises to $15. Your shares are now worth $150,000. Not one to get too greedy, you take profits for a $50,000 gross profit or 50% return.

But what would happen to your gain if you went 50% on margin? Your $100,000 could have bought you 20,000 shares at $10, or $200,000 worth of stock. A year later, your 20,000 shares are worth $300,000 and you sell. Therefore, your gross gain is $100,000 for a 100% return after paying back the $100,000 you purchased on margin.

Even though you had to pay a 7% interest on the $100,000 margin loan equal to $7,000, your net gain before taxes is still $93,000 for a 93% return. Wow! Margin investing sounds awesome!

The Negative Of Margin Investing

Let's say you buy 20,000 shares of a $10 stock on margin for $200,000. Instead of the stock appreciating by 50% in a year, it declines by 50%. Your 20,000 shares are now worth only $100,000. Given you started with $100,000 in cash and lost $100,000 on margin, you end up with a negative 100% return! You are wiped out!

What's worse, you also owe the brokerage company $7,000 in margin interest. Therefore, you've not only lost everything, but now owe money. The brokerage firm wins. You lose.

The Dreaded Margin Call

To protect itself, an online brokerage will have a margin call. Think about the margin call as an equity buffer for the online brokerage. The online brokerage knows that some investors will run out of money and not pay their margin interest.

Therefore, to help ensure the online brokerage stays profitable while margin lending, it has a minimum equity requirement as collateral value.

The minimum equity requirement for a margin loan is usually between 30% to 35%, depending on the type of securities the investor holds and the brokerage firm. If the collateral equity value declines below this percentage, the investor will receive a margin call.

If you receive a margin call (maintenance call), you must deposit enough cash to be above the minimum equity requirement. Otherwise, your online brokerage has a right to sell your securities to fulfill the requirement.

Margin calls only happen when your margined investment is tanking. And if you can't come up with the cash, then you might end up selling your leveraged investment at a terrible time. Buying high, selling low is a way to poverty.

Margin Call Example

Assume you own $100,000 in stock and buy an additional $100,000 on margin, resulting in 50% margin equity. You are borrowing the maximum allowed by your brokerage.

Let's say your stock falls by 40% from $200,000 to $120,000. Your equity would drop to only $20,000 ($120,000 in stock less the $100,000 in margin debt you still owe).

If your brokerage firm's maintenance requirement is 30% (30% of $120,000 = $36,000), you would receive a margin call for $16,000 because you only have $20,000 in equity.

If you can't come up with the $16,000 in cash within a certain amount of time, the brokerage firm may be forced to sell enough equity to reach the maintenance requirement of 30%.

In this case, the brokerage firm might have to sell about $53,334 in equity AFTER it has declined by 40% for you to meet the maintenance requirement of 30% if you can't come up with $16,000 cash.

If you only have $20,000 in equity with a 30% maintenance requirement, the most exposure you can have is $66,666 (= $20,000 / 30%). Therefore, $120,000 – $66,666 = $53,334.

But, if the stock continues to decline, despite selling $53,334 in equity, the online brokerage firm will still have to sell more equity at a loss for you to meet the 30% maintenance requirement!

This type of death spiral is what helps accelerate panic selling. People panic because they see other people being forced to sell due to margin calls. And what's more, hedge funds can often borrow even more than typical retail investors through their prime broker.

If everybody is long or short in a particular security, massive movements tend to occur and compound on themselves.

FTX, the formerly second-largest cryptocurrency exchange went from over $30 billion valuation to less than $0 due to inappropriate lending of client assets. As a result, its founder, Sam Bankman-Friend went from a net worth over about $16 billion to negative in 48-hours. Going on margin ruined Sam's net worth.

Use Margin Sparingly Please

Margin loans increase your level of market risk. Your downside is not limited to the collateral value in your margin account. You could lose everything, have to come up with more cash, and lose that amount too. Further, you will have margin loan interest to repay.

Margin calls happen when things are going really bad. You are not entitled to an extension of time to meet a margin call. Therefore, your online brokerage account will force a sell at the most inopportune time if you cannot come up with the cash.  

Again, the only people who may be fine with you going on margin to buy stocks are those working at a brokerage firm. Instead of buying stocks on margin, buy stocks with cash only. If you want to buy more stocks, make and save more money.

Buying stocks on margin is only profitable if your stocks go up enough to pay back the loan with interest. However, with margin interest rates multiple times higher than the risk-free rate of return, your net returns will likely be uninspiring.

If you want to buy stocks on margin, you may consider it during the next bear market after stocks decline by greater than 20%. But, when stocks are expensive and priced for perfection, going on margin is risky. A swift downturn could easily wipe you out.

The only time where margin can be useful is covering you during slow ACH transfers or when you're mailing in funds. If the market takes a big dip while you're waiting for your funds, and you want to get in, you can use margin for a few days to buy stocks. Other than that, margin investing isn't worth it.

Diversify Your Investments Into Real Estate

Stocks are very volatile compared to real estate. If you want to margin up, then you should invest in a less risky asset like real estate.

The combination of rising rents and rising capital values is a very powerful wealth-builder. By the time I was 30, I had bought two properties in San Francisco and one property in Lake Tahoe. These properties now generate a significant amount of mostly passive income.

In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms. With interest rates down, the value of cash flow is up. Further, the pandemic has made working from home more common.

Take a look at my two favorite real estate crowdfunding platforms. Both are free to sign up and explore. 

Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the easiest way to gain real estate exposure. 

CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio. 


Invest In Private Growth Companies

In addition, consider investing in private growth companies through a fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment. 

One of the most interesting funds I'm allocating new capital toward is the Innovation Fund. The Innovation fund invests in:

  • Artificial Intelligence & Machine Learning
  • Modern Data Infrastructure
  • Development Operations (DevOps)
  • Financial Technology (FinTech)
  • Real Estate & Property Technology (PropTech)

Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!

The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. In addition, you can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.

Buying Stocks On Margin Is A Bad Idea is a Financial Samurai original post. With stocks selling off in 2022, many investors who bought stocks on margin have suffered great losses. Some tech stocks are down 50% – 80% over the past 12 months. If you bought these stocks on margin, you would have lost all your money and then some. I'd invest in real estate instead.

46 thoughts on “Buying Stocks On Margin Is A Bad Idea: You Could Easily Lose Everything”

  1. Would it change the risk profile if the margin account is fed by pension?

    Paying off in 6-12 mo? No shorting, straight 5k loan of VTI / VXUS at a time?

    1. Yes, a pension would lower your risk profile. But why use pension money to buy stocks on margin? You’ve already won the game and are in retirement if you are collecting a pension. What’s the point of trying to make more?

      1. Perhaps the account could be passed down to future heirs. Coming from nothing and having something is honestly overwhelming. I just got through listening to your pod cast on minimalism that aligns how I have carried my self, until children. My wife went to WM also (Kinesiology). With sam parents employed in the foreign service we also appreciate how transient our lives can become. Thus, the podcast really hit home when it comes to appreciating time. I learned this in HS that I didn’t graduate until later in life.

        This is tough for my spouse who only knows hard work and save. Ask what this money is for in the future, no clue. Could care less we deduct close to 60k a year on her W2. What will this money be for? Whatever she wants she says. From a certain stand point I can see where she is coming from because she has never experienced strife as I did. Sam understands the value of time and I have heard very few financial personalities place as much upfront value as he does.

        I learned the value of minimalism through poverty. I see life style creep in our family presently. Some of it is welcomed in the sense as I feel like we leveled up in life. Our shared goals are to accumulate enough in the margin account for our life style in our final days. We already having one real estate and will have one to two more over the course of our life time (~40yrs left). Would it be simpler in the later years to have a healthy cash cushion and pass away with the step up for our children? Have you considered a generation skipping trust? Taxable also frees up who ever inherits it from the other restrictions that come with a roth (10yr distribution) or pre-tax being added to their income.

        I still haven’t got the math down, if Sam lives off 200k a year holding a well diversified account how much of a nest egg would he need to only leverage ~10-15%? The debt gets paid off yearly or quarterly if you’re a dividend king. Now, only after one creates their death book are they allowed to die, in that year the account is passed down and the debt is covered by the cash cushion.

        1. He’s still around and had a baby. But he may have lost about $500,000, so potentially all or at least 80% of his profits. This is tough because his income is around $100,000.

          The good thing is that he is still healthy and has a new member to his family. Just need to work longer that’s all.

  2. Oh geez… After reading this and all the comments, you all have me a little concerned. So here it is June 24th, 2021. Fed has spoke and inflation is definitley pumping but he thinks its transitory. Well I kind of agreed. Look at Lumber skyrocting 170% up till February then down 40% from that point. Oil is moving up but also coming down.. Growth stocks with lower P/E’s looking better and better everyday. So I have been flat ever since recovering back about 65% of my losses since March 23rd 2020. It was painful. I’ve been tired of this 0% 1 and a half year performance. I’ve picked stocks (about 5 of them) that gained at least 400% but sold to soon. I would just like to get back up to about 10% and call it a year, LOL. So guess what I did. I went full on tech last week. 100% of my available margin. Basically doubling my priced investments. I plan to sell everything once I make about 15 %. I feel like a melt up is coming in July then a HUGE crash in August. So naturally I fell I can do this. I can read the indicators. I’ve got a couple of them being the VIX shooting above 25ish, the 10 year yield shooting back above around 1.6%, more talk of interest rate hikes ect.. Maybe a few of my growth stocks report average earnings ( because we all know they are going to come in higher than estimates but how much higher?). So I guess you could say I’m leveraged to the max and I may be a prime candidate for a margin call in say July when I’m holding out till August 1st. After I read all this, I’m ready to sell EVERYTHING and just wait for the big one. Then go all in with 100% margin, LOL!! I need some nudges in one direction or another. Thanks

  3. At Interactive Brokers, I had to change my account to margin in order to be able to short sell stocks.

  4. TD Ameritrade charges me a 6% margin interest rate – this seems like a great deal for them and a terrible deal for me. But at 1.8% like what IB is offering from the comment above, this then becomes a no brainer.

    So should I transfer my $$ to IB and give this a shot with 10-20% of my after-tax portfolio? I don’t see why not..

      1. Is it a terrible strategy to fill up a brokerage account at Interactive Brokers with $1m in equity – safe stuff like VTI, VTV and BRK.B then get a line of credit at about 20% of the portfolio and invest that in Fundrise. I figured that a 50% crash in the world stock market is unlikely and the line of credit would essentially leverage me into Real Estate, allowing me to benefit as if I had a mortgage.

  5. Bravo, somebody had to say it. People seem to be increasingly playing with fire because of this super long and strong bull market, they don’t understand how burned they can get and it’s hard to witness. I’m curious how many people who are currently using margin were using it in 2007, and how many who were using it in 2007 are using it today (and if they are whether or not they have a gambling addiction!).

    How somebody answers the question, “What’s the worst that can happen?” reveals a lot about the risk that they take. The thought that, “The market always eventually goes up” ignores how much it can drop and how long it can keep dropping and stay down. How many people saying this could weather a similar 2 year 60% drop, especially if it might come with some level of income/expense strain?

    It’s wise to account accordingly for improbable occurrences, but some, many?, people entirely ignore improbable in their risk assessment and instead of getting hit hard by improbable circumstances, get completely wiped out. Optimism bias and not thoroughly crunching the numbers is a risky combo!

  6. Re: “as long as you are disciplined” and “avoid greed”

    Yes, true. But honestly, how many retail investors can actually do that? And for as long as they are on margin? Whether the market is up or down? Throughout high or low market volatility?

    Even Sam himself, the lead Financial Samurai, has openly admitted having trouble with staying disciplined and avoiding greed at times. And he has actual experience working in the financial brokerage industry. *sigh*

  7. I have to say Sam, that your argument here is completely illogical.

    Question: Why did you buy the “stocks?

    Answer: Because you think that they are going to appreciate in value.

    Margin is just a way of magnifying that increase (or decrease). Margin is a tool and not inherently good or bad. Also, you do not have to margin up to the 50% limit.

    1. You can buy EFTs on margin which are indexes of individual stock that avoid the ‘active investor’ concern.
    2. You already have the downside risk. The margin just magnifies it. Again, I cannot see how you like the investment at 0% margin, but don’t like it at say 25% margin? With respect to this criteria, why is buying one asset (real estate) on much higher margin good, while buying another asset (EFTs) at lower margin bad?
    3. Margin costs money. Here is the key differentiator. Do you think that the stocks/EFTs will appreciate more than the margin rate. If not, don’t buy on margin.
    4. I don’t think that buying on margin will exasperate your emotional stress. Most people have a baseline level of stress. Now if you are margined such that one down day wipes you out, that’s a different matter. But stock margin is capped at 50%. That won’t happen even in your 32% down worst-case scenario.
    5. Actually, it can help and act as a stop-loss trigger. See my bond experience below.

    There is one ironclad rule of borrowing money: never borrow money for personal consumption. Only borrow for investment purposes and only when you have the skills, experience, and temperament to handle it.

    Note your primary residence is not an investment. It is personal consumption. And it is the exception that proves the rule: you should borrow to buy a primary residence even though it is presently consumption. And note that real estate can fall by 50% also. Attached is the Case Shiller Phoenix Home Price index for the last 30 years ( The peak in 2007 was 230. By 2011 it was down to 100. If you bought your primary residence at the peak; for 80%, 90%, 95%, 97% or 100% (yes there were ‘no money down’ loans and even, 103% loans!) LTV you were ‘underwater’. The difference between home loans and margin loans though, is that the home lender does not have the contract clause to call the loan due for an LTV violation if you pay the mortgage. The stock (or bond) margin loan lender does have that clause and will immediately exercise it. That is why margin lenders face virtually no risk of losing their principal. And it is why the margin call acts as a stop-loss order (if not ‘order’, at least a suggestion).
    Note that commercial lenders do have that contract clause to call the loan due if the LTV falls a to a certain level. The 2008-2011 “Great Recession” shown in the graph, affected commercial properties as much or more than residential. We owned an apartment complex that met the LTV violation limit; it was worth less than the loan. The bank did not call the loan. Instead, as part of the ‘solution’ to the “Great Recession”; they sold the ‘bad’ loans to a third party at a discount. In turn the third party offered us a discount on the money owed if we put up more capital and got another loan. We did and closed out the debt at a $1M discount. The IRS considers canceled debt as income that you owe taxes on. But there is a way around that, IRS Form 982.

    Here is what happened when I bought Government bonds on 90% margin long, long ago:
    “And like most other investments, you can buy US Treasury notes on margin. Long, long ago; 1981 to be exact, I bought 30-year US Treasury bonds (if the term is longer than 10 years, it’s a “bond”, not a note) on 90% margin. That is, I put up 10% of the face value and borrowed the remainder from the broker, Charles Schwab as I remember. I have repressed most of the memory and my records from 40 years ago are spotty. Why repressed? Because I ended up selling at the exact bottom of the market. After I bought on margin, interest rates continued to rise (thanks, Paul Volcker).

    So, the value of the bonds decreased. Schwab sent me a margin call: I have to put up more money to maintain the 90% margin or liquidate my position and take my losses. I put up the extra money. Then a few months later, another margin call. It was “only” six hundred and some dollars. I threw in the towel and took my losses. That was the ‘bottom’ of the market… Bonds have been in an unprecedented 30 year bull market ever since.”

    1. Thanks for sharing Jim and good points. Feel free to margin all you want. It’s your money and you know best.

      This is the beauty of personal finance. Do you think my article is completely illogical. But I think it’s completely logical. Everything is rational in the end. If we are comfortable with our Investments and our money and our lifestyles, that’s all that matters.

  8. Margin used sparingly is not a bad idea in my opinion. Like fire, it can cook your food and provide heat to survive, over use it and your house burns to the ground. Margining 20% or less of your portfolio value for other investments, emergency cash, or whatever your heart desires is reasonable in my book. You can withstand a 60% drawdown even if the maintenance requirement is increased to 50%. If things get uglier than that, we have much bigger issues to worry about.

  9. Agreed that active non-professional investors tend to underperform. I knew of a gambler who would brag about winnings on black jack. None of us ever seemed to hear about the losses they incurred or the overall net. This parallels the story I now hear of a friend who is a non-professional day trader. All massive wins (lots of 0000s) and never a loss. Who hasn’t had a massive upside in this long bull? Sometime I think the louder the bark the greater the hidden loss. Also I believe in random walk. This theory has only been solidified by my own experience in corporate. I watch Form 4’s and stock prices like a hawk.

    People buying on margin are a whole different breed. That’s what can precipitate a crash in this bull and those will be the losers. I know of so many in the other corner with cash parked, so I’m wondering if those of us with liquidity will help rebound quickly one prices sink.

  10. GratefulReader

    This is the first time someone has explained the concept of margin investing clearly enough for me to understand the concept fully. Thank you for this article.

    1. My thoughts EXACTLY! Thanks Sam for explaining things so clearly.

      I was beginning to wonder why would brokerage houses allow purchases on margin in the first place? Duh. INTEREST paid to THEM. As the saying goes, “Follow the money”.

      Interesting to learn retirement accounts are prevented from using margin. At least someone is trying to protect ourselves from ourselves.

      Thanks again for explaining things so clearly with concrete examples. Now I understand that graph of real S&P vs real margin debt. Looks VERY scary to me!

  11. Very well written article on Margin trading. I would add 2 things:
    1) Loss Aversion theory is real: Pain of a loss is (psychologically) about twice as powerful as the pleasure of gain e.g. if somebody gave us a $300 bottle of wine, we may gain a small amount of happiness (utility). However, if you owned a $300 bottle of wine and it got dropped, you would be much more unhappy. Same with stocks losses and gains.
    2) If you are spending a good amount of time watching stock prices go up/down everyday (which most margin investors do) than you probably have too much invested in it.

  12. Steve Brandt

    Excellent article and advise.
    Especially now, the margin game is like playing with a flame thrower!

  13. In and around 2007 I had two folks in my life have me consider margin. One touted it as a risk-less way to borrow $100K “because the markets always go up”. The other briefly discussed it with me but told me my saving habits meant I did not need to take that type of risk to meet my goals….he is my financial advisor that I still have today.

    Thinking back I knew nothing of margin or the risk I could have put myself and family in (especially with 2008 right around the corner). I went with my gut that since I pushed so hard at the time to pay off my mortgage and carry no debt why would I borrow to invest and give other people my money in the form of interest!

    1. EXACTLY!

      I am starting to be concerned now about all the commercials I see regarding debit cards for kids. These things are advertised as a way for young people to gain a financial education – their parents pay them for chores /allowance by adding to the card, the youths can save up for future purchases (with their spending approved by their parents – I think?) … including STOCK purchases! Sounds like these companies want to get rich off youths by taking advantage of their parents’ financial ignorance. When people are living paycheck to paycheck and don’t have enough savings to cover a $400 unexpected cost, that is not the time to be buying stocks. Sounds a lot like big tobacco: “Get them while they’re young.” :(

  14. i have maintained a margin balance for the past 8 years with Interactive Brokers. I only margin about 35% so my equity is 65% and buy only total market indexes. Based on my diversified portfolio, IB will allow my margin to go as low as 15%. I pay 1.8% interest. No brainer. As long as you are disciplined you can increase your annual returns significantly using margin. Even if the market dropped 50% i would be ok.

    1. I have an IB account too. I plan on using margin to get cash to buy real estate. I think my rate will be about 1.2%. It will only amount to about 20% of my account value though.

      Is there a chance that IB could change the required margin? I can currently go as far as 6 to 1 leverage, so I could buy $6M in securities with $1M in my account. Is it possible that IB could change the amount of leverage available overnight and issue an immediate margin call?

    2. How have your returns been? And what are you shooting for?

      I’m very interested in the fact that so long as we are making money, we get to save and invest more money. So if you are always on margin, does that mean you always feel like you don’t have enough money invested?

      1. You actually can add margin over time as your account grows. Let’s say you have $1m. You buy an additional $350k of stock on margin. Market goes up 20% so you have $1.62M stock and $1.27M equity. That’s a 27% return before a little margin interest. You can either let it ride and watch your equity % grow or add a little margin to keep your margin rate at 35%. Margin rates are so low it’s crazy not to arbitrage this. I am paying less than 2%. Yes the market can go down but over time it goes up. As long as you are disciplined you really can’t lose. Actually surprised FS doesn’t see this. Agree it’s a loaded weapon if used improperly but we Samurais are smart disciplined and out to win.

        1. Jeff, can we chat on this topic? Ive borrowed on IBKR as well and have added alot on margin and would like to pick your brain.

        2. Agreed.

          And being “disciplined”, IMHO, means keeping margin rate to a point that even the worst bear market in the past 50 years hits tomorrow, I still won’t get a margin call (or, in IB’s case, having to liquidate immediately). That’s my bottom line. Of course, being a little more adventurous, one can play with the probability of x% of market fall, and determine their ideal margin rate – and be displined to maintain.

          There are other financial tools such as options to stop losses even if the unthinkable happens. But I feel those tools could also take away the opportunity of the recovery return. It’s up to each investor to determine whether they want to use them.

          Overall, I believe caring a healthy margin with my brokerage, just like investing with leverage in real estate, is an optimal strategy to boost my FI progress, especially when I still have active income. My calculation will certain change when active income stops, though.

    3. At a 1.8% interest rate, I agree, this seems like a no-brainer. If you think the stock market is going to go up, don’t we all (isn’t that why we’re in stocks?), I don’t see why you wouldn’t do at least 10-20% on margin so there’s no chance of a margin call.

      What am I missing?

  15. In an earlier email you mentioned wanting to give your friend a 50,000 loan to cover his losses on margin. I have loaned money to friends in the past and often it is never repaid. I wonder how you thought he would pay you back especially if Tesla did not recover. Possibly you were not concerned about losing the money. Buying stocks on margin seems to be like betting at the casino. The house or the broker in this cases always has advantage.

    1. Slowly. I think he has family money because he talks about his rental properties as well that his parents bought.

      If I had lost $200,000 in one week on margin, I would be very perturbed. And I wouldn’t want to ask my parents for money because that is very uncomfortable as an adult. Explaining you need money due to margin is not good.

  16. I had quite a bit of margin borrowings prior to 2008. I *thought* I was being reasonably conservative by restricting the amount of borrowing to 35% or less so I could afford a ‘normal’ correction of 10%-15% and even weather the usual ‘bear market’ downturn of 25%-40%. But when 2008 turned out to be worse than the ‘normal’ bear market, I actually ended up having to sell off a large chunked of my stock portfolio at pretty low prices to ensure I didn’t get any margin calls during Q2 2018. After the GFC I have been a lot more tentative about using margin lending, restricting myself to about 10% margin at most.

    While using margin lending to boost overall returns is great in theory (why not borrow OPM at 6% if the average market return is closer to 9%?), the impact of a downturn can be so severe when margin lending is involved that only a very small amount of margin borrowing is prudent, even for an investor with a large portfolio and high (and secure) income stream. Rather than look to using margin lending to make quick, extra-large gains in a booming market, it should only be used to add a small increment to total portfolio returns in the long term, if at all.

    1. That’s the thing, if you are on margin and face a downturn, your margin call is just replenishing your losses. You’re not actually buying more stocks at lower prices.

  17. The only thing I find margin useful for is covering me during slow ACH transfers. If the market takes a big dip and I want to get in before it rebounds, I’ll use margin for a few days until the money from another account gets sent over. Otherwise, not worth the risk!

      1. Margin is not the enemy. Greed is. I have used margin successfully until greed took over. In the beginning I saw how 10% margin increased my rate of return. When the market went down, I was ok. There would be no margin call.
        But then greed took over. I used the maximum amount of margin my broker would extend. When the market went down 30% it was all over. Margin calls at 2:00 a.m.
        turned my blood cold.
        Margin is a useful strategy, just watch out of greed.

  18. I remember when you first told us about your teacher friend in your newsletter. Like you, I thought he must have invested maybe $250k in margin. But almost a million bucks!! I like living on the edge of my seat but that’s like so far out of the edge of my seat, it would be way too much for me.

    If I was making $10mm per year, sure, I would gladly margin a million but if I’m making 70,000 a year, no chance would I ever margin that much. Still wishing the best for your friend though.

  19. I’ve never bought stocks on margin. I learned it was not a good strategy from my job in back end ops for hedge funds. I saw so many margin calls it was kinda nuts. They lost so much money I felt bad for the clients who put their money into their funds.

    I’m really happy being a passive investor and staying clear of margin. I don’t have the time or interest in following stocks and looking for winners. I like to set it and forget it!

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