If there’s one thing I don’t recommend, it’s buying stock on margin. Due to the volatility of stocks and high margin interest rates, borrowing money to buy stocks is a bad idea.
Conversely, I’m not opposed to buying a home on margin, namely through a mortgage, if buying follows a homebuying guideline like the 30/30/3 rule. Homes provide utility in the form of shelter, are generally held for around 12 years, can generate income, and are much less volatile. Mortgage rates tend to also be much lower than margin rates.
But the reality is, buying any risk asset on margin is risky, as it amplifies both losses and wins. If you borrow too much, you could wipe yourself out if you are forced to sell.
Let me use myself as a case study on buying stock on margin—why I did it, the potential repercussions, and the key questions you should ask yourself before opening a stock margin account.
It turns out, I actually bought about $12,000 worth of stock on margin at a 12.575% interest rate, and I didn’t even realize it for a week. A 12.575% margin interest rate is highway robbery and something I’d never willingly take on. However, that’s exactly what I did for a short while.
One of my main responsibilities as a father is to ensure the financial security of our household. After purchasing a house we didn’t need in the second half of 2023, I temporarily put our household at risk by dramatically cutting down our liquidity.
Since then, I have taken on part-time consulting roles, performed some personal finance consulting, and saved and reinvested almost everything I earned in stocks, bonds, and real estate. More than 16 months later, my “Financial Security Fund” is in good shape with about $706,000, or roughly two years’ worth of comfortable living expenses.
As a religious dollar-cost averager since the early 2000s, I’ve become hardwired to invest in stocks every month. When stocks started declining at the beginning of 2025, I wanted to buy even more because that’s what dollar-cost averagers do.
There was just one big problem: I didn’t have the money to invest! But invest I did because I had a margin account at Fidelity.
Here’s a snapshot of some of the VTI ETF I bought on margin.
Why I Bought Stock On Margin At An Expensive 12.525% Interest Rate
Before writing this post, I hadn’t realized how much stock I’d bought on margin or even what the margin interest rate was. However, my mental cash flow calculations hinted I’d dipped into margin, especially since my account displayed, “Available without margin impact: $0.00,” and yet I kept buying.
Here’s why this happened—and why you should think twice before doing the same.
1) It Was Dangerously Easy to Do
The first reason I bought stock on margin is because I could—effortlessly. Years ago, I remember clicking some buttons asking whether I wanted to create a margin account in order to buy some securities. So I did. Opening one was so easy.
This ease is a double-edged sword. Fidelity provided no warnings about the consequences of buying stock on margin, nor did it highlight how much the borrowing cost would be. Inputting a purchase transaction on a margin account felt no different from my usual routine, creating a frictionless (and risky) process.
2) A Regular Investment Habit
I’ve been investing at the beginning and middle of every month since I got my first job in 1999. This inertia has kept me disciplined, regardless of whether I’ve had a job, no job, or even enough cash on hand. Dollar-cost averaging has served me well, so stopping when stocks were correcting felt counterproductive, even in a cash-tight moment.
3) Taking Advantage Of the Dip
Over 29 years of investing, I’ve developed a strong urge to buy the dip. Historically, fear of losing more would sometimes hold me back, but as I diversified and grew my net worth, I became more confident in my ability to weather downturns.
When the S&P 500 dipped from ~6,084 to 5,800, I felt compelled to act—not just for my financial future, but for my kids’ (ages 7 and 5). With a 20-year horizon, I believe today’s prices will look like bargains down the road, even if the S&P 500 continues to correct. I’ll keep dollar-cost averaging to take advantage of future dips, knowing that long-term investing is my focus.
4) Confidence in New Income
I also bought on margin because I anticipated incoming income. I had dividends and online income on the way in a couple weeks. In essence, this was a timing mismatch between cash flow and investing opportunities, and I didn’t want to miss a dip waiting for the funds.
This is similar to using an overdraft line of credit for your checking account to smooth out expense timing. A margin account can serve the same purpose for active investors, though it requires careful oversight.
5) It Was a Manageable Amount
Finally, the margin purchase was modest: ~$12,000 or less than 2% of my total portfolio balance. I knew I could pay it back quickly, minimizing the interest expense.
For context:
- The 30-day cost to borrow $12,000 at a 12.575% rate is about $124.
- The two-week cost, a more likely scenario, is approximately $58.
At the time, I assumed the rate would be closer to 8–9%, or double 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 portfolio to reduce the balance.
Below is a snapshot of my account’s Balance Details, showing a negative cash balance of $10,585.13, equivalent to my margin balance. It also highlights my daily margin interest expense of $3.70 and a month-to-date expense of $29.95. I ultimately paid my margin balance off in two weeks.
A Margin Account Creates Dangerous Temptation
While margin can be a useful tool for seasoned investors, it’s essential to fully understand your borrowing costs and risks before diving in. Learn from my experience: keep your cash flow in check, and carefully weigh the cost-benefit of using margin.
Once you open a margin account—or convert your account to one—you may face the temptation to leverage up. For example, my margin-buying power is $723,268, which could easily entice me to go all-in on speculative investments. While the outcome could be great, it could also end disastrously.
Given the high margin interest rate of 12.575%, most people wouldn’t buy stock on margin and hold it for 12 months. This is especially true if Wall Street’s median forecast for the S&P 500 is well below the margin interest rate. Remember, one figure is a forecast that may or may not come true, your margin interest rate is a guaranteed cost.
Instead, margin traders typically borrow short-term, aiming for a quick profit. Unfortunately, day trading rarely works out as planned, often leaving traders poorer due to both trading losses and margin interest expenses.
Don’t purposefully buy stock on margin. The temptation to make undisciplined trades or exceed your risk tolerance is high. Using margin can feel like gambling in a casino or playing high-stakes Texas Hold’em poker—thrilling but inherently risky if you don’t have discipline.
Questions To Ask Yourself Before Opening A Margin Account
For those of you still considering opening a margin account, take a moment to reflect on these questions first. If you can confidently answer yes to at least three of the following, only then might a margin account be worth exploring:
- Do you have at least a two-pack of abs?
- 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 average historical returns of the stock market, your chances of making or losing money, and the costs tied to buying stocks on margin?
- Do you have a degree in finance, work in finance, or have an MBA?
- Did you have at least $100,000 invested 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 10X your annual household income?
Don’t Buy Stocks On Margin If You Don’t Have To
If you struggle with addictive tendencies or lack financial discipline, don’t open a margin account. Instead, stick to the tried-and-true method of buying stocks with a portion of your income and holding. Over the long term, you’re likely to achieve better outcomes than the margin trader—without the 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 the stock? Have you ever given in to temptation and bought more stock on margin than you should have? How did that experience turn out?
Diversify Into High-Quality Private Real Estate
Investing in stocks is a fine choice for your retirement. However, I also suggest diversifying into real estate—an investment that combines the income stability of bonds with greater upside potential. With stocks expensive, I see more value in real estate at the moment.
Consider Fundrise, a platform that allows you to 100% passively invest in residential and industrial real estate. With about $3 billion in private real estate assets under management, Fundrise focuses on properties in the Sunbelt region, where valuations are lower, and yields tend to be higher.
I’ve personally invested over $300,000 with Fundrise, and they’ve been a trusted partner and long-time sponsor of Financial Samurai. With a $10 investment minimum, diversifying your portfolio has never been easier.
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