As a software developer with a background in mathematics, I’ve always been comfortable with numbers. During the COVID era, like many others, I found myself diving headfirst into the stock market. It started as a hobby—reading charts, studying sectors, exploring the differences between index and value investing. Back then, everything seemed to be going up in value. I thought, “How hard can this be?”
I still remember the thrill of buying my first SPAC stock. It was a Special Purpose Acquisition Company (SPAC)—essentially a shell corporation that takes private companies public without the traditional IPO process. When it merged and the ticker changed, the stock shot up 200%. The excitement was intoxicating, and I started believing I could replicate those wins.
That’s when I discovered margin investing—a seemingly “no-brainer” way to amplify my returns. Spoiler alert: it didn’t go as planned.
What Is Margin Investing?
Margin investing allows you to borrow money from your brokerage to buy more stocks than you could with your own funds. Here’s how it works:
1. Open a Margin Account: Your broker offers you a line of credit based on the securities in your account.
2. Borrow to Buy: You use that borrowed money to purchase additional stocks.
3. Pay Interest: You pay an annual interest rate—typically around 3% to 10%, depending on your broker and market conditions.
The idea is straightforward: if the stock market’s average return is around 10% (like the S&P 500 historically), and you’re borrowing at 3%, then you’d pocket the 7% difference. It seems like free money—until the market turns against you.
Why People Warn Against Using Margin
1. Margin Calls: A Recipe for Forced Losses
When you borrow on margin, you’re at the mercy of market fluctuations. If your portfolio’s value falls below a certain level, your broker issues a margin call, requiring you to either deposit more funds or sell off assets.
The problem? In a market dip, you often end up selling at the worst possible time. Unlike long-term investors who can hold on until prices recover, margin investors don’t have that luxury.
2. Emotional Pressure
Using margin creates a constant undercurrent of stress. You know you could be forced to sell if the market takes a sudden hit—whether it’s due to poor earnings reports, inflation, geopolitical events, or even a global pandemic. This makes it incredibly hard to stick to your convictions, even when you believe a stock will eventually bounce back.
I’ve been there—watching stocks I believed in drop, knowing I couldn’t wait out the storm because of the looming threat of a margin call.
3. Overconfidence & Stock Picking
Margin fuels overconfidence. Early wins, like my SPAC stock success, made me believe I could pick the next big winners. I piled into meme stocks, speculative plays, and sectors like EVs and cannabis, thinking I could outperform the market.
The truth? Beating the broader indexes (like the S&P 500) is notoriously difficult. Leverage magnifies both gains and losses, so when my picks didn’t pan out, the losses stung even more.
The Problem with “Bad Money”
I came across a concept in a Korean book about money that changed my perspective. It defined “bad money” as:
• Borrowed funds (like margin).
• Money you’ll need soon (e.g., rent or emergency savings).
• Money gained by luck (lottery winnings or gambling).
Investing with “bad money” often leads to poor decisions. When you’re using borrowed money, you’re more likely to sell out of fear during downturns or avoid doing proper research because the money doesn’t feel like yours. Margin fits this definition perfectly.
What I Learned About Investing
Over time, I’ve shifted my approach to something more sustainable:
1. Dollar-Cost Averaging (DCA): Investing a fixed amount at regular intervals helps smooth out the effects of market volatility.
2. Avoiding Emotional Decisions: I’ve learned to buy on “red days” and avoid chasing stocks. If I miss an entry point, I move on—there are countless opportunities out there.
3. Patience Over Leverage: I now avoid margin and focus on using leveraged ETFs for short-term plays when I have high conviction.
Conclusion: Why Margin Isn’t Worth It
Margin investing can seem like a shortcut to wealth, especially during bullish markets. But it amplifies the risks just as much as the rewards. When things go south—and they will—you’ll find yourself forced to sell at the worst time, undoing all your hard work.
In my experience, the slow, steady approach to investing has been far more rewarding. By using your own hard-earned money, you can make rational decisions without the panic that comes from owing a lender.
If there’s one thing I’ve learned, it’s this: investing isn’t about hitting home runs; it’s about building wealth methodically over time. Let’s make our money work for us—not the other way around.
#Stock
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