Dangers of Borrowing for Stocks | Generated by AI
People say “don’t borrow money to buy stocks” (i.e., don’t buy on margin or take personal loans to invest) for very good reasons. Here’s why it’s considered extremely dangerous, even when you think you’re smart:
1. You can lose more than you originally put in
- When you borrow to invest (margin loan, personal loan, credit card, etc.), you owe the money back no matter what happens to the stock price.
- Example: You have $50k cash and borrow another $50k at 10–12% interest to buy $100k of stock.
- Stock falls 40% → your portfolio is now worth $60k.
- You still owe $50k + interest. You’re down $40k+ on a $50k initial investment → almost wiped out.
- If it falls 50%+ (very common in bear markets or single-stock crashes), you’re completely broke and still in debt.
2. Margin calls force you to sell at the worst moment
With real margin accounts (not just personal loans):
- Broker requires you to keep a minimum equity percentage (usually 25–50%).
- If the stock drops and your equity falls below that, you get a margin call.
- You must deposit cash or sell stocks immediately — usually right at the bottom when everyone is panicking.
- This turns a paper loss into a permanent, massive loss.
3. Interest eats your returns even when you’re right
Let’s say stocks average 7–10% long-term return:
- If you pay 8–18% interest (current margin rates or personal loan rates), you’re already behind or barely breaking even before the market even moves.
- You have to beat the market by a huge amount just to cover interest, and most people don’t.
4. Psychological damage is enormous
- Normal investing: a 30% drop hurts, but you can wait.
- Leveraged investing: a 30% drop can wipe you out or force you to sell everything. Most people panic, sell at the low, and swear off stocks forever — exactly the wrong behavior.
5. Real historical examples of disaster
- 1929 crash: Thousands of people borrowing on 90% margin were destroyed in days.
- 2000–2002 dot-com bust: Many tech employees and investors who borrowed to buy more shares went bankrupt.
- 2022: People who bought “safe” high-growth stocks (ARKK, Tesla, etc.) on margin at 2021 highs got margin-called and lost everything when they fell 60–90%.
6. The math is brutal
To make borrowing worthwhile long-term, you need to consistently earn more than your borrowing cost + a safety buffer. Historically:
| Borrowing cost | Required average return just to break even | What actually happens most of the time |
|---|---|---|
| 10% | >12–15% | Market returns ~7–10% → you lose slowly |
| 15–18% (credit cards, some personal loans) | >20% per year | Almost impossible consistently → you lose fast |
When is it ever okay?
Almost never for retail investors. The only people who routinely use leverage successfully are:
- Professional traders with strict risk systems
- Hedge funds that can hedge and use very sophisticated strategies
- Extremely disciplined people who treat it like a business and cut losses instantly (99% of people think they are this person; almost none actually are)
Bottom line
Borrowing to buy stocks turns investing (which is already risky) into gambling with your entire financial life. A single bad year can bankrupt you, trigger margin calls, destroy your credit, and force you to sell your house or delay retirement by decades.
That’s why almost every experienced investor and every finance textbook says the same thing:
Never borrow money you have to pay back to buy stocks that can go to zero.
If you wouldn’t bet your house on a single coin flip, don’t borrow money to buy stocks. The downside is literally unlimited, the upside is limited.