{"id":65287,"date":"2025-02-03T02:10:30","date_gmt":"2025-02-03T02:10:30","guid":{"rendered":"https:\/\/peraltafinancing.com\/business\/finance\/bought-stock-on-margin-at-a-12-575-interest-rate-and-survived\/"},"modified":"2025-02-03T02:10:30","modified_gmt":"2025-02-03T02:10:30","slug":"bought-stock-on-margin-at-a-12-575-interest-rate-and-survived","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=65287","title":{"rendered":"Bought Stock On Margin At A 12.575% Interest Rate And Survived"},"content":{"rendered":"


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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.<\/p>\n

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<\/a>. 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.<\/p>\n

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 due to a margin call or job loss.<\/p>\n

Let me use myself as a case study on buying stock on margin\u2014why I did it, the potential repercussions, and the key questions you should ask yourself before opening a stock margin account.<\/p>\n

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Bought Stock On Margin At A 12.575% Interest Rate<\/h2>\n

It turns out, I actually bought about $12,500 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.<\/p>\n

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<\/a> in the second half of 2023, I temporarily put our household at risk by dramatically cutting down our liquidity.<\/p>\n

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 \u201cFinancial Security Fund\u201d is in good shape with about $706,000, or roughly two years’ worth of comfortable living expenses. My ultimate goal is to get the fund to grow to at least six years worth of living expenses by December 31, 2027. <\/p>\n

As a religious dollar-cost averager<\/a> 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.<\/p>\n

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.<\/p>\n

Here’s a snapshot of some of the VTI ETF I bought on margin.<\/p>\n

\"Just<\/figure>\n

Why I Bought Stock On Margin At An Expensive 12.525% Interest Rate<\/strong><\/h2>\n

Before writing this post, I hadn\u2019t realized how much stock I\u2019d bought on margin<\/a> or even what the margin interest rate was. However, my mental cash flow calculations hinted I\u2019d dipped into margin, especially since my account displayed, \u201cAvailable without margin impact: $0.00,\u201d<\/em> and yet I kept buying. <\/p>\n

Here\u2019s why this happened\u2014and why you should think twice before doing the same.<\/p>\n

1) It Was Dangerously Easy to Do<\/h3>\n

The first reason I bought stock on margin is because I could\u2014effortlessly. Years ago, I remember clicking some buttons asking whether I wanted to create a margin account in order to buy some speculative securities. So I did. Opening one was so easy.<\/p>\n

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.<\/p>\n

2) A Regular Investment Habit<\/h3>\n

I\u2019ve 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\u2019ve 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 abnormal, even in a cash-tight moment.<\/p>\n

Make it a habit to pay yourself first by saving and investing a portion of your income each month before spending. Stick with it for 10 years, and you\u2019ll be amazed at how much wealth you\u2019ve built. Aim for a minimum saving rate of 20%, but strive for 50%<\/a> if you want to achieve financial freedom even sooner.<\/p>\n

3) Taking Advantage Of the Dip<\/h3>\n

Since staring my stock investing journey in 1996, I\u2019ve 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<\/a>, I became more confident in my ability to weather downturns. Once you’ve experienced a couple bear markets, you’re no longer as worried. <\/p>\n

When the S&P 500 dipped from ~6,084 to 5,800, I felt compelled to act\u2014not just for my financial future, but for my kids\u2019 (ages 7 and 5). With a 20-year horizon, I believe today\u2019s prices will look like bargains down the road, even if the S&P 500 continues to correct. I\u2019ll keep dollar-cost averaging to take advantage of future dips, knowing that long-term investing is my focus.<\/p>\n

4) Confidence in New Income<\/h3>\n

I also bought on margin because I anticipated incoming income. I had dividends, reimbursements, and online income<\/a> on the way in a couple weeks. In essence, this was a timing mismatch between cash flow and investing opportunities<\/em>, and I didn\u2019t want to miss a dip waiting for the funds.<\/p>\n

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.<\/p>\n

5) It Was a Manageable Amount<\/h3>\n

Finally, the margin purchase was modest: ~$12,500 or less than 2% of my total portfolio balance. I knew I could pay it back quickly, minimizing the interest expense.<\/p>\n

For context:<\/p>\n