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Why I'm so against using margin.
1/8
1/8
Margin's a fancy way of saying your brokerage is lending you money to buy more stocks.
It's debt.
So if your brokerage allows you to borrow 50% on margin, $1,000 becomes $1,500.
In exchange, you pay interest on your loan.
2/8
It's debt.
So if your brokerage allows you to borrow 50% on margin, $1,000 becomes $1,500.
In exchange, you pay interest on your loan.
2/8
Here's why margin is SO tempting, especially for new investors...
Given low interest rates, you can borrow for, say, 2.5% a year.
Peanuts compared to the 10% historical stock market return. And much, much lower than the returns many investors have seen this past year.
3/8
Given low interest rates, you can borrow for, say, 2.5% a year.
Peanuts compared to the 10% historical stock market return. And much, much lower than the returns many investors have seen this past year.
3/8
When stock prices rise, you look like an absolute master of the universe!
If your stock goes up 50%, you gain 75%!
BUT...
4/8
If your stock goes up 50%, you gain 75%!
BUT...
4/8
Here's the catch.
Contrary to popular memes, stonks don't always go up.
And when they go down, margin kills you.
5/8
Contrary to popular memes, stonks don't always go up.
And when they go down, margin kills you.
5/8
Back to example of boosting $1,000 to $1,500 using 50% margin...
If your stock falls 50%, that $1,500 becomes $750.
But remember, you borrowed $500.
So really your $1,000 becomes $250 ($750-$500).
6/8
If your stock falls 50%, that $1,500 becomes $750.
But remember, you borrowed $500.
So really your $1,000 becomes $250 ($750-$500).
6/8
But even before THAT, your brokerage would have made a margin call on you, forcing you to add more money or sell your stock.
Remember, the money and stock you put in is the brokerage's safety net...they need to maintain that even if you're in a bind b/c your stocks fell.
7/8
Remember, the money and stock you put in is the brokerage's safety net...they need to maintain that even if you're in a bind b/c your stocks fell.
7/8
Let's make this simpler...
Using debt to buy stocks means you're REALLY confident in 1) Your ability to pick good stocks AND 2) That those stocks won't fluctuate.
That's similar to the logic used by many people who lost their houses in 2008.
Please don't use margin.
8/8
Using debt to buy stocks means you're REALLY confident in 1) Your ability to pick good stocks AND 2) That those stocks won't fluctuate.
That's similar to the logic used by many people who lost their houses in 2008.
Please don't use margin.
8/8
