If there’s one thing I don’t recommend, it’s buying stocks on margin. Due to stock volatility and high interest rates, borrowing money to buy stocks is a bad idea.
Conversely, I am not opposed to purchasing a home on margin, i.e. with a mortgage, if the purchase follows home buying guidelines such as the 30/30/3 rule. Homes provide utility in the form of shelter, are typically kept for about 12 years, can generate income, and are much less volatile. Mortgage rates also tend to be much lower than margin rates.
But the truth is that buying any risky asset on margin is risky, because it magnifies losses and gains. If you borrow too much, you could ruin yourself if you have to sell.
Let me use myself as a case study on buying stocks on margin — why I did it, the potential ramifications, and the key questions you should ask yourself before opening a stock margin account.
Shares were purchased on margin at an interest rate of 12.575%.
It turns out that I actually bought about $12,500 worth of stocks on margin at a 12.575% interest rate, and didn’t realize it for a week. A marginal interest rate of 12.575% is highway robbery and something I would never willingly accept. However, that’s exactly what I did for a short time.
One of my main responsibilities as a father is ensuring our family’s financial security. After purchasing a home we didn’t need in the second half of 2023, I temporarily put our family at risk by significantly reducing our liquidity.
Since then, I’ve taken on part-time consulting roles, done some personal finance consulting, and saved and reinvested almost everything I’ve earned in stocks, bonds, and real estate. More than sixteen months later, my Financial Security Fund is in good shape with about $706,000, or nearly two years of comfortable living expenses. My ultimate goal is to grow the fund to at least six years of living expenses by December 31, 2027.
As a believer of dollar-cost averaging since the early 2000s, I’ve become committed to investing in stocks every month. When stocks started falling at the beginning of 2025, I wanted to buy more because that’s what dollar-cost averaging does.
There was only one big problem: I didn’t have the money to invest! But I invested because I had a margin account at Fidelity.
Here’s a quick snapshot of some of the VTI ETFs I’ve bought on margin.
Why did I buy stocks on margin at the expensive interest rate of 12.525%?
Before writing this post, I didn’t realize how much stock I bought on margin or even what the margin interest rate was. However, my mental cash flow calculations indicated that I was down to margin, especially as my account showed, “Available without margin impact: $0.00” However I continued to buy.
Here’s why this happens, and why you should think twice before doing the same.
1) It was dangerously easy to do
The number one reason I buy stocks on margin is so I can do so effortlessly. Years ago, I remember clicking some buttons asking if I wanted to set up a margin account to buy some speculative securities. So I did. Opening one was very easy.
This ease is a double-edged sword. Fidelity did not provide any warnings about the consequences of buying stocks on margin, nor did it highlight how much it would cost to borrow. Entering a buy transaction on a margin account was no different from my usual routine, resulting in a frictionless (and risky) process.
2) Regular investment habit
I’ve been investing at the beginning and middle of every month since I got my first job in 1999. This rigidity has kept me disciplined, regardless of whether I have a job, no job, or even enough cash on hand. Dollar cost averaging had served me well, so stopping when stocks were correcting felt unnatural, even in a moment of tight liquidity.
Make it a habit to pay yourself first by saving and investing a portion of your income each month before spending. Stick to this for 10 years, and you’ll be amazed at how much wealth you’ve accumulated. Aim for a minimum savings rate of 20%, but aim for 50% if you want to achieve financial freedom sooner.
3) Take advantage of the decline
Since I began my stock investing journey in 1996, I have developed a strong desire to buy dips. Historically, the fear of losing more has sometimes held me back, but as I diversify and grow my wealth, I’ve become more confident in my ability to weather downturns. Once you experience some bear markets, you won’t worry anymore.
When the S&P 500 fell from 6,084 to about 5,800, I felt compelled to act — not just for the sake of my financial future, but for the sake of my children (ages 7 and 5). With a 20-year horizon, I think today’s prices will look like bargains in the future, even if the S&P 500 continues to correct. I will maintain dollar cost averaging to take advantage of future declines, knowing that long-term investing is my focus.
4) Confidence in new income
I also bought on margin because I anticipated the income coming in. I had profits, refunds, and online income on the way within two weeks. In essence, this was a Timing mismatch between cash flow and investment opportunitiesand I didn’t want to miss any dips waiting for the money.
This is similar to using an overdraft line of credit on your checking account to facilitate the timing of expenses. A margin account can serve the same purpose for active investors, although it requires careful monitoring.
5) It was a manageable amount
Finally, my margin purchase was modest: ~$12,500 or less than 2% of my total portfolio balance. I knew I could pay it back quickly, reducing interest costs.
For context:
- The 30-day cost of borrowing $12,000 at an interest rate of approximately 12.575% $125.
- The cost of two weeks, which is the most likely scenario, is approx $59.
At the time, I assumed the rate would be closer to 8-9%, or twice the risk-free rate of return, so discovering the true cost prompted me to immediately transfer every spare dollar from my checking account to my Fidelity wallet to reduce it. Balance.
Below is a snapshot of my account balance details, showing a negative cash balance of $10,585.13, which is equivalent to my margin balance. It also highlights a daily margin interest expense of $3.70 and a month-to-date expense of $29.95. I eventually paid my margin balance within two weeks.
A margin account creates dangerous temptations
While margin can be a useful tool for experienced investors, it’s essential to fully understand the costs and risks of borrowing before diving in. Learn from my experience: Keep your cash flow under control, and carefully weigh the cost and benefit of using margin.
Once you open a margin account — or convert your account to one — you may run into a problem seduction To benefit. For example, my margin buying capacity is $723,268, which could easily tempt me to enter into speculative investments. While the result can be great, it can also end disastrously.
Given the high margin interest rate of 12.575%, most people wouldn’t buy stocks on margin and hold them for 12 months. This is especially true if Wall Street’s average forecast for the S&P 500 is much lower than the marginal interest rate. Remember, number one is an expectation that may or may not come true, and your marginal interest rate is a guaranteed cost.
Instead, margin traders typically borrow in the short term, with the goal of making a quick profit. Unfortunately, day trading rarely goes as planned, often leaving traders poorer due to trading losses and margin interest expenses.
Do not intentionally buy stocks on margin. There is a great temptation to make undisciplined trades or exceed your risk tolerance. Using margin may seem a bit like gambling in a casino or playing high-stakes Texas Hold’em poker – exciting but inherently risky if you don’t have discipline.
Questions you should ask yourself before opening a margin account
For those of you who are still thinking about opening a margin account, take a moment to think about these questions first. If you can answer confidently Yes, at least three From the following, only then may a margin account be worth exploring:
- Do you have at least two sets of abdominal muscles?
- Have you spent at least 10 years mastering your craft and becoming an expert in your field?
- Can you easily go 60 days without smoking, drinking alcohol, soda, coffee, or using other substances?
- Do you fully understand the historical average stock market returns, the opportunities to make or lose money, and the costs associated with buying stocks on margin?
- Do you have a degree in finance, work in finance, or have an MBA?
- Did you invest at least $100,000 during the 2008 global financial crisis to understand your true risk tolerance?
- Do you have a high risk tolerance, demonstrated by investing at least 80% of your portfolio in stocks for five years or more?
- Do you or your spouse have a stable job with strong career growth prospects?
- Is your net worth equal to at least 10 times your annual household income?
Don’t buy stocks on margin if you don’t have to
If you have addictive tendencies or lack financial discipline, don’t open a margin account. Instead, stick with the tried-and-true method of buying stocks with a portion of your income and assets. In the long run, you are likely to achieve better results than trading on margin – without any unnecessary stress or risk.
Readers, do you buy stocks on margin? If so, when do you typically use margin, and how do you decide how long to hold a stock? Have you ever given in to temptation and bought more stocks on margin than you should have? How did that experience come about?
Investing in private growth companies
If you’re comfortable buying stocks on margin, consider shifting some of your focus to investing in private growth companies. With companies remaining private longer, the lion’s share of the gains are now being captured by private investors. It makes sense to allocate more investable capital toward these opportunities.
Take a look at Fundrise venture capital productwhich lets you dollar-cost average with at least $10 in private growth companies in AI and others. I personally have invested $153,000 in Fundrise Venture, and I am bullish on its potential. Additionally, Fundrise has been a long-time sponsor of Financial samurai.
And with Trump announcing a $500 billion AI infrastructure initiative in partnership with Softbank, Oracle, and OpenAI — dubbed Stargate — it’s clear that the government sees AI as a transformative technology. In 20 years, I don’t want my kids asking why I didn’t invest or work in AI when the opportunity was so clear!
Although I’m not a fan of buying stocks on margin, I am a fan of investing in high-quality growth names in a diversified portfolio. I plan to continue dollar cost averaging in venture capital over time because now I can.
He bought the shares on margin at an interest rate of 12.575% and survived It is an original publication of the Malian Samurai. All rights reserved. Join over 60,000 wealth builders by signing up for our free weekly newsletter here.