• Skip to main content
  • Skip to primary sidebar
  • Markets
  • Trade Ideas
  • Reflections
  • Links
  • Trading Program
    • Spec Model Trading Manual
    • Spec Model Trades
    • Spec Model Positions
  • Income Model
    • Income Model Trading Manual
    • Income Model Trades
    • Income Model Positions
  • Watch List
    • Watch List: Spec Long Plays
    • Watch List: Spec Short Plays
    • Watch List: Income Plays
  • About
    • Privacy Policy
    • Terms of Service
    • Terms of Participation

Zach Scheidt

Helping families build wealth so they can focus on what really matters

Investing With Margin: Is it Right For You?

January 18, 2022 at 12:09 pm by Zach Scheidt

Investing with Margin

A friend asked for my thoughts on investing with margin in his brokerage account. And since this is an important — and sometimes controversial — topic for investors, I wanted to share some thoughts.

Hopefully today’s alert will give you some ideas for how to grow your wealth more quickly in the market, while still protecting the savings you’ve worked so hard to set aside.

What IS Margin Anyway?

Margin investing is simply borrowing extra cash from your broker to buy more shares of stock. This option is available for most brokerage accounts.

When you use margin to buy more stock, the process accelerates your returns (both positive and negative). That’s why many investors and traders call this process “leveraging.” Because you’re moving more stock with less capital – the way you might move a heavier load with less effort by using a lever.

Brokerage accounts make it very easy to start this process. And typically, these brokerages offer great interest rates on the margin loans.

That’s because if you borrow money to buy or sell more shares, you’ll naturally generate more commissions and fees for the brokerage. In other words, brokerages typically make more money off customers who use margin.

But is this process good for you? Will it help you increase your wealth more quickly?

Well, that depends…

Potential Benefits from Investing With Margin

Investing with margin can be a tool that helps grow your wealth much more quickly.

Let’s look at an example of an investor who locks in a 20% return on his stock portfolio.

If this investor starts with $100,000 in cash and grows that wealth by 20%, he’ll wind up with a gain of $20k.

But if the investor borrows an additional $100,000 and invests with margin, he’ll be able to generate a 20% return on a portfolio of $200,000 in stock.

That basket of stocks would end the year with $40,000 in profit. And even if the investor had to pay a 3% interest rate on the $100,000 borrowed, the investor using margin would walk way with a 37% return.

So when things are going well, this investment tool can help accelerate profits and grow your wealth much more quickly.
But to understand whether investing with margin is right for you, it’s important to understand the risks as well.

The Downside of Investing With Margin

When markets become more turbulent and uncertain, the appeal of investing with margin starts to fade. That’s because investing with margin also amplifies negative returns if your investments lose value.

Suppose instead of a 20% gain, a bear market causes your investments to drop by 20%. What would that do to the value of your investment account?

For a normal $100k brokerage account, a drawdown of 20% would drag the value of the account down to $80,000. You would then need a 25% positive return to get back to breakeven.

But if an investor were to borrow and invest an additional $100,000 — and then be hit with a 20% decline, the full $200,000 portfolio would lose $40k in value.

Tack on interest charges of another 3% or so and you’ve got a $43k decline. So after paying off the loan, this investor will only have $57,000 of his original $100,000 remaining.

Now it will take a 75% return just to get this investor back to breakeven!

Using This Investment Tool Wisely

Understanding the risk and potential reward of investing with margin can help you make a much wiser decision with your own account. And while some might say you should never use margin, I think it’s a tool that can be used carefully if the situation is right.

Here are some points to consider when making your own decision.

How aggressive is your strategy? If you are investing in very stable companies with stocks that tend to rise steadily over time, margin may make a lot of sense. But using margin to invest in more volatile plays can be like adding gasoline to an already blazing fire. Dangerous!

What other assets or income do you have? Investing with margin with your entire life’s savings after retiring from your full time job would open yourself up to a lot of risk. But if you’ve got income from a steady job, a growing investment in your home, and other opportunities to grow your wealth, the picture is different.

What is “at risk” and what benefits could you enjoy? When making my own decision about investing with margin I think about my family situation. After all, the risks (and potential returns) don’t just matter to me. I don’t want a potential loss to cause us to change the way we live. But I do like the idea of growing my wealth so that I can enjoy more special occasions with my family. That’s how I personally think of balancing these dynamics.

Here’s one last thing to consider… Using a more conservative strategy like selling put contracts for income can be a better way to invest with margin.

When you sell a put contract, you’re able to collect income in exchange for your promise to buy stock. As part of this process your broker will set aside cash in your account in case you’re required to buy those shares.

Using margin with a strategy like this will allow your broker to set aside additional borrowed cash to back up the put contracts you sell. But since this strategy has less risk than buying shares outright, using margin can be more appropriate for some investors.

Bottom line, this investment tool can make a big difference in your returns over time. But be sure to use it wisely as any tool can be dangerous if used recklessly.

(Trade procedure: 5 minutes after this notification posts, I will enter the trade on my brokerage platform. Once filled I will edit this post to include execution prices.)

Please note: I am placing these trades in my own account. And while I notify the group of all trades 5 minutes before I place my own personal trades, this creates a conflict of interest. Please review all disclosures and agreements included with your subscription packet.

Filed Under: Education, Public Tagged With: Investment income, investor education, Stock trading

Primary Sidebar

Get your FREE copy of my watch list




You’ll also receive my (almost) daily market insights — you can cancel at any time.

good stocks fall

Why Good Stocks Fall

Good stocks fall when investors need cash (and have no options left). That’s good news and points to a rebound in sight!

value stocks outperform

April was Brutal — But There Are Still Winning Stocks

Stocks fell in April — booking the worst month for the Nasdaq since the dot-com crisis. But despite the carnage value stocks outperformed

Stock Market Indicator

This Stock Market Indicator Points to a Bounce

There’s a lot of fear in today’s market. But despite the selling, one stock market indicator is signaling a bounce!

Three reasons to buy Meta

Three Reasons to Buy Meta Ahead of Earnings

Facebook’s parent Meta Platforms is scheduled to release earnings this week. Here are three reasons I chose to buy Meta ahead of the report.

Investors are buying stock insurance

Investors Buying “Stock Insurance” – Here’s How to Profit

The price for “stock insurance” — or put contracts that protect investors’ wealth — is rising. Here’s how to use that to your advantage!

Barbell Approach

For Stronger Investment Returns, Use THIS Barbell

Splitting your investment account into a “safe” portion and more “aggressive” positions can help to manage risk and improve returns.

This Market is FULL of Great Investment Plays

There is no shortage of opportunity in today’s market. But you have to know where to look for the best investment plays.

Quarterly Trading Update

Quarterly Trading Update — March 2022

Now that the first quarter is over, I wanted to share an update on how our trading models performed.

gold investors

Three Options for Gold Investors

As precious metal prices rise gold investors have quite a few options. Here are three ways to profit from higher gold and silver.

invest in gold

Three Reasons to Invest in Gold

Inflation is raging along with the threat of long-term war. With so much uncertainty, it’s a good time to invest in gold.

Speculative Tech Stocks

It’s Time to Start Buying Speculative Tech Stocks

Speculative tech stocks spent the last year trading sharply lower. But today, these oversold stocks are poised to rebound!

Avoid target date funds

Avoid Target Date Funds Like the Plague

Target date funds claim to lower risk as you approach retirement. But in today’s market these funds are dangerous!

Growth stocks versus value stocks

Growth Stocks Versus Value Stocks: Where’s the Bargain?

Let’s talk growth stocks versus value stocks… After such a dramatic pullback, is it time to buy back into growth?

thankful for short sellers

Investors Should be Thankful for Short Sellers

Last week’s market rebound shows why investors should be thankful for short sellers. Covering bearish bets helped propel the rebound.

Investment weeds

Don’t Water Your Investment Weeds

Not all investments work as planned. Some bloom with profits, and some become investment weeds. Don’t pick your flowers and water your weeds!

DISCLAIMER: Stocks and options trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the stocks and options markets. Don't trade with money you can't afford to lose.

This is neither a solicitation nor an offer to Buy/Sell stocks or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this page. The past performance of any trading system or methodology is not necessarily indicative of future results.

All trades, patterns, charts, systems, etc., discussed on this page are for illustrative purposes only and not to be construed as specific advisory recommendations. Information contained on this site or in any correspondence is intended for informational purposes only and was obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.

Arete Publishing, LLC · Copyright © 2022 · All Rights Reserved
Privacy Policy · Terms of Service · Terms of Participation · Log in