If there’s one thing I do not recommend, it’s buying stocks on margin. Due to the volatility of stocks and high margin rates of interest, it is just not idea to borrow money to purchase stocks.
Conversely, I’m not against buying a house on margin, namely through a mortgage, if the acquisition follows a house buying guideline comparable to the 30/30/3 rule. Homes provide utility in the shape of accommodation, are typically held for around 12 years, can generate income and are much less volatile.
However, the truth is that purchasing dangerous assets on margin is dangerous since it magnifies each losses and gains.
Let me use myself as a case study on buying stocks on margin – why I did it, what the potential impact is, and what key questions it is best to ask yourself before opening a stocks margin account.
Shares purchased on margin at an rate of interest of 12.575%
Turns out I actually bought about $12,000 price of stock on margin at an rate of interest of 12.575% and I didn’t even know it for per week! A margin rate of interest of 12.575% is absurdly high and something I’d never willingly accept. However, that is exactly what I did for a short while.
One of my foremost responsibilities as a father is to make sure the financial security of our household. After purchasing a house we didn’t need within the second half of 2023, I temporarily jeopardized our budget by drastically reducing our money flow.
Since then, I’ve taken on part-time consulting roles, done some personal finance consulting, and saved and invested almost the whole lot I earned in stocks, bonds, and real estate. More than 16 months later, my “Financial Security Fund” is in good condition at about $706,000, or about two years’ price of living expenses.
Since I’ve been a non secular averager since we bought our house, I’m committed to investing in stocks every month. As stocks began to say no at the beginning of 2025, I desired to buy much more because that is what dollar-cost averagers do.
There was only one big problem: I did not have the cash to take a position! But I invested because I had a margin account with Fidelity.
Here is a snapshot of some VTI ETFs I purchased on margin.
Why I purchased stocks on margin at an expensive rate of interest of 12.525%
Before writing this post, I used to be unaware of what number of stocks I had purchased on margin or what the margin rate of interest was. However, my mental money flow calculations suggested that my margin had dropped, especially since my account showed up, and yet I continued to purchase.
Here’s why that happened—and why it is best to think twice before doing the identical.
1) It was dangerously easy
The first reason I purchased stocks on margin is because I could do it effortlessly. This lightness is a double-edged sword. Fidelity didn’t warn about the implications of shopping for stocks on margin or provide any information concerning the amount of borrowing costs. Entering a purchase order transaction was no different from my usual routine and resulted in a smooth (and dangerous) process.
2) An everyday investment habit
Since I got my first job in 1999, I even have been investing firstly and middle of every month. This inertia kept me disciplined no matter whether I had a job, no job, and even enough money. Dollar-cost averaging has served me well, so stopping now felt counterproductive, even in times of tight budgets.
3) Take advantage of the decline
Over my 25 years of investing, I even have developed a powerful urge to purchase on dips. In the past, the fear of losing more sometimes held me back, but as I diversified and grew my net price, I became more confident in my ability to weather downturns.
When the S&P 500 fell from around 6,084 to five,800, I felt compelled to act – not just for my financial future, but additionally for that of my children (ages 7 and 5). With a 20-year time horizon, I imagine today’s prices will appear like bargains in the long run, even when the S&P 500 continues to correct. I maintain dollar-cost averaging to reap the benefits of future dips as I give attention to long-term investments.
4) Confidence in recent income
I also bought on margin because I expected income to are available. I had dividends and online income on the go in a number of weeks. Essentially, this was a timing mismatch between money flow and investment opportunities, and I didn’t wish to miss out on a dip while waiting for funds.
This is analogous to using an overdraft in your checking account to smooth out spending planning. A margin account can serve the identical purpose for energetic investors, but requires careful monitoring.
5) It was a manageable amount
Finally, the margin purchase was modest: about $12,000. I knew I could pay it off quickly and minimize the interest expense.
For context:
- The 30-day cost of borrowing $12,000 at an rate of interest of 12.575% is roughly $124.
- The two-week cost, a more likely scenario, is roughly $58.
At the time, I assumed the rate of interest can be closer to 8-9%, and after I discovered the true cost, I immediately transferred every spare dollar from my checking account to my Fidelity portfolio to scale back the balance.
Below is a snapshot of my account balance details, showing a negative money balance of $10,585.13, which is my margin balance. It also highlights my each day margin interest expense of $3.70 and current month expenses of $29.95.
A margin account creates a dangerous temptation
While margin is usually a useful gizmo for skilled investors, it is crucial that you simply fully understand your borrowing costs and risks before jumping in. Learn from my experience: keep your money flow under control and punctiliously weigh the cost-benefit ratio of using margin.
Once you open a margin account – or convert your account into one – it’s possible you’ll face the challenge of accelerating leverage. For example, my margin purchasing power is $723,268, which could easily tempt me to go all-in on speculative investing. While the consequence may very well be great, it is also disastrous.
Given the high margin rate of interest of 12.575%, most individuals would not buy stocks on margin and hold them for 12 months. This is very true when Wall Street’s median forecast for the S&P 500 is well below the margin rate.
Instead, margin traders typically borrow short-term loans to make a fast profit. Unfortunately, day trading rarely works out as planned, leaving traders often poorer attributable to trading losses and margin interest expenses.
DI do not buy stocks specifically on margin. The temptation to make undisciplined trades or exceed your risk tolerance is robust. Using margin can feel like playing in a casino or playing high-stakes Texas Hold’em poker – exciting but inherently dangerous for those who do not have discipline.
Questions to ask yourself before opening a margin account
If you are still occupied with opening a margin account, it is best to first take a moment to take into consideration these questions. If you possibly can answer with confidence Yes If you meet a minimum of three of the next, a margin account might only be price considering:
- Do you may have a minimum of a double pack of abs?
- Have you spent a minimum of 10 years mastering your craft and becoming an authority in your field?
- Can you easily go 60 days without smoking, alcohol, soda, coffee or other substances?
- Do you fully understand the typical historical returns of the stock market, your possibilities of making or losing money, and the prices related to buying stocks on margin?
- Do you may have a finance degree, work in finance or have an MBA?
- Did you invest a minimum of $100,000 through the 2008 global financial crisis?
- Do you may have a high risk tolerance, demonstrated by investing a minimum of 80% of your portfolio in stocks over a period of 5 years or longer?
- Do you or your spouse have a stable job with good profession prospects?
- Is your net price a minimum of 10 times your annual household income?
Don’t buy stocks on margin for those who do not have to
If you suffer from addictive tendencies or lack financial discipline, it is best to not open a margin account. Instead, follow the tried-and-true method of shopping for stocks with a portion of your income. In the long term, you’ll likely achieve higher results than the margin trader – without unnecessary stress or risk.
Diversify into high-quality private real estate
Investing in stocks is alternative in your retirement. However, I also suggest diversifying into real estate – an investment that mixes the income stability of bonds with greater upside potential. Since stocks are expensive, I see more value in real estate at once.
Consider Call for donationsa platform that means that you can invest 100% passively in residential and industrial real estate. With roughly $3 billion in private real estate assets under management, Fundrise focuses on real estate within the Sunbelt region, where valuations are lower and returns are inclined to be higher.
I personally have invested over $300,000 with Fundrise and so they are a trusted partner and long-time sponsor of Financial Samurai. With a minimum investment of $10, diversifying your portfolio has never been easier.
is an original post from Financial Samurai. All rights reserved. Join over 60,000 other wealth builders by subscribing to my free weekly newsletter here.
