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.
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. 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.
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.
Let me use myself as a case study on buying stock on margin—why I did it, the potential repercussions, and the key questions you should ask yourself before opening a stock margin account.
Bought Stock On Margin At A 12.575% Interest Rate
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.
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 in the second half of 2023, I temporarily put our household at risk by dramatically cutting down our liquidity.
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 “Financial Security Fund” 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.
As a religious dollar-cost averager 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.
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.
Here's a snapshot of some of the VTI ETF I bought on margin.
Why I Bought Stock On Margin At An Expensive 12.525% Interest Rate
Before writing this post, I hadn’t realized how much stock I’d bought on margin or even what the margin interest rate was. However, my mental cash flow calculations hinted I’d dipped into margin, especially since my account displayed, “Available without margin impact: $0.00,” and yet I kept buying.
Here’s why this happened—and why you should think twice before doing the same.
1) It Was Dangerously Easy to Do
The first reason I bought stock on margin is because I could—effortlessly. 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.
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.
2) A Regular Investment Habit
I’ve 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’ve 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.
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’ll be amazed at how much wealth you’ve built. Aim for a minimum saving rate of 20%, but strive for 50% if you want to achieve financial freedom even sooner.
3) Taking Advantage Of the Dip
Since staring my stock investing journey in 1996, I’ve 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, I became more confident in my ability to weather downturns. Once you've experienced a couple bear markets, you're no longer as worried.
When the S&P 500 dipped from ~6,084 to 5,800, I felt compelled to act—not just for my financial future, but for my kids’ (ages 7 and 5). With a 20-year horizon, I believe today’s prices will look like bargains down the road, even if the S&P 500 continues to correct. I’ll keep dollar-cost averaging to take advantage of future dips, knowing that long-term investing is my focus.
4) Confidence in New Income
I also bought on margin because I anticipated incoming income. I had dividends, reimbursements, and online income on the way in a couple weeks. In essence, this was a timing mismatch between cash flow and investing opportunities, and I didn’t want to miss a dip waiting for the funds.
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.
5) It Was a Manageable Amount
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.
For context:
- The 30-day cost to borrow $12,000 at a 12.575% rate is about $125.
- The two-week cost, a more likely scenario, is approximately $59.
At the time, I assumed the rate would be closer to 8–9%, or double the risk-free rate of return, so discovering the true cost prompted me to immediately transfer every spare dollar from my checking account to my Fidelity portfolio to reduce the balance.
Below is a snapshot of my account’s Balance Details, showing a negative cash balance of $10,585.13, equivalent to my margin balance. It also highlights my daily margin interest expense of $3.70 and a month-to-date expense of $29.95. I ultimately paid my margin balance off in two weeks.
A Margin Account Creates Dangerous Temptation
While margin can be a useful tool for seasoned investors, it’s essential to fully understand your borrowing costs and risks before diving in. Learn from my experience: keep your cash flow in check, and carefully weigh the cost-benefit of using margin.
Once you open a margin account—or convert your account to one—you may face the temptation to leverage up. For example, my margin-buying power is $723,268, which could easily entice me to go all-in on speculative investments. While the outcome could be great, it could also end disastrously.
Given the high margin interest rate of 12.575%, most people wouldn’t buy stock on margin and hold it for 12 months. This is especially true if Wall Street’s median forecast for the S&P 500 is well below the margin interest rate. Remember, one figure is a forecast that may or may not come true, your margin interest rate is a guaranteed cost.
Instead, margin traders typically borrow short-term, aiming for a quick profit. Unfortunately, day trading rarely works out as planned, often leaving traders poorer due to both trading losses and margin interest expenses.
Don’t purposefully buy stock on margin. The temptation to make undisciplined trades or exceed your risk tolerance is high. Using margin can feel like gambling in a casino or playing high-stakes Texas Hold’em poker—thrilling but inherently risky if you don't have discipline.
Questions To Ask Yourself Before Opening A Margin Account
For those of you still considering opening a margin account, take a moment to reflect on these questions first. If you can confidently answer yes to at least three of the following, only then might a margin account be worth exploring:
- Do you have at least a two-pack of abs?
- Have you spent at least 10 years mastering your craft and becoming an expert in your field?
- Can you easily go 60 days without smoking, drinking alcohol, soda, coffee, or using other substances?
- Do you fully understand the average historical returns of the stock market, your chances of making or losing money, and the costs tied to buying stocks on margin?
- Do you have a degree in finance, work in finance, or have an MBA?
- Did you have at least $100,000 invested during the 2008 Global Financial Crisis to understand your true risk tolerance?
- Do you have a high risk tolerance, demonstrated by investing at least 80% of your portfolio in stocks for five years or more?
- Do you or your spouse have a stable job with strong career growth prospects?
- Is your net worth equal to at least 10X your annual household income?
You can call your brokerage to ask for a lower margin rate. However, when I did, Fidelity only lowered it by 1.05% to 11.525%, still egregiously high. With less than $25,000 in margin debit, they said the best they can do is 11.525%. However, with over a $1 million margin debt, the rate drops to 8.25% + a 1.05% discount to 7.2%.
Don't Buy Stocks On Margin If You Don't Have To
If you struggle with addictive tendencies or lack financial discipline, don't open a margin account. Instead, stick to the tried-and-true method of buying stocks with a portion of your income and holding. Over the long term, you’re likely to achieve better outcomes than the margin trader—without the unnecessary stress or risk.
Readers, do you buy stocks on margin? If so, when do you typically use margin, and how do you decide how long to hold the stock? Have you ever given in to temptation and bought more stock on margin than you should have? How did that experience turn out?
Invest In Private Growth Companies
If you’re comfortable buying stocks on margin, consider shifting some of your focus to investing in private growth companies. With businesses staying private longer, the lion’s share of gains is now being captured by private investors. It’s only logical to allocate more of your investable capital toward these opportunities.
Take a look at the Fundrise Venture Capital product, which lets you dollar-cost average with as little as $10 into private growth companies in the AI space and others. Personally, I’ve invested $153,000 in Fundrise Venture, and I’m optimistic about its potential. Plus, Fundrise has been a long-time sponsor of Financial Samurai.
With Trump announcing a $500 billion AI infrastructure initiative in partnership with Softbank, Oracle, and OpenAI—dubbed Stargate—it’s clear the government sees AI as a transformational technology. In 20 years, I don’t want my kids asking why I didn’t invest in or work in AI when the opportunity was so clear!
Although I'm not a fan of buying stocks on margin, I am a fan of investing in high-quality growth names in a diversified portfolio. I plan to continue dollar-cost averaging into venture capital over time because now I can.
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Bought Stock On Margin At A 12.575% Interest Rate And Survived is a Financial Samurai original post. All rights reserved. Join 60,000+ other wealth-builders by subscribing to my free weekly newsletter here.
Love your content! Why not get a line of credit backed by your portfolio, SBLOC. I have one with Schwab at a rate of 7.69%
Thanks! I will consider it. In general, I try not to get into the temptation of borrowing money. So at the very least, I will call Fidelity and ask them to lower the margin rate.
See: An SBLOC To Borrow From Your Stocks
Did you unclick the button and disable margin going forward? You can always enable it again later. Seems like a bad default account behavior.
Nah, just left it. Will call Fidelity to lower my usurious rate.
A couple years back I followed Buffets lead and bought some Japan stocks on margin. The interest rate is 4.3%. Of course not as good as what Buffet got by selling JPY bonds! But it removes (nearly) all exchange rate risk on the position, and the dividends have covered about 90% of the interest cost over that 2 years. So 2 years on margin now and counting………. !
I’ve used margin to make cash offers on real estate. I keep it under 20% of the portfolio and only use it for a few months. Then I got a mortgage or paid off the margin with my income. It allowed me to close within a few weeks without selling stocks or holding excessive cash. At the time, the rate was about 1.5%.
Great use of the margin for a bridge loan. Hope the property has done well since purchase.
I always have margin loans though the amount of leverage is small and the interest rates are much lower than what you quoted. Using margin for long term investment is tax advantaged as you can deduct the interest at your marginal tax rate but only pay CGT rates on profits.
We are experiencing modern monetary theory at its finest here. Basically anything that people do now can raise the GDP of the United States. Buy fartcoin? Add to GDP, sell pictures of your body on Only Fans? Add to GDP, stream games on Netflix using servers instead of showing the game over the airwaves? Add to GDP. Buy unlimited amounts of servers to store fartcoin wallets and photos of your favorite Instagram model? Add to GDP.
The interesting thing about all of this new GDP growth is it is limitless. I have seen price targets for the S&P 500 in 2030 at above 15,000. That would mean an almost tripling of economic output in the next few years. There is too much capital changing too few goods and so people have money to buy meme crypto and risk assets.
We have been doing this a nation since the 1930s and my worry is what is all this wealth for? Poverty and inequality are exploding, how do we balance this artificial and fantastic growth to make sure that people who actually make stuff still are taken care of? We can have both things at once. I hope that this nation finds a heart along with all of this fantastic wealth created from literally anything we can imagine. No rules for wealth creation anymore. It is remarkable and both political parties are all in on this new theory of economics.
I think it starts with the individual. We help where we can. What is it that you are doing to help those you are concerned about? Always good to hear about the actions readers take. I try to do my part through free financial education on the site.
I worked in the public education system for decades and taught thousands of students at great financial and personal sacrifice. Your site is awesome and I read it often. I am also mentoring my family members to make sure they benefit from this knowledge. Of course individuals can make a difference but at the end of the day we need to make sure we have guarantees of health care, shelter and other things. With all of this new imaginary wealth we can certainly accomplish those things while still allowing the billionaires to have their mega yachts and hookers.
I am set for the future, but my concern for the nation is that a lot of people aren’t and extreme levels of poverty could cause harm to all of us. I don’t want that future for us and there is still time to save this wonderful system and make sure that labor and workers are still valued in this country. Most ordinary folks I talk to do not believe they are valued anymore. A lot of kids feel that way also. Very sad for our future indeed. We collectively must commit to doing better.
I voted to expand Medicaid in my state and as a direct result of that vote 500,000 people have health insurance in my state now that would not have access before. Those are the things that make a difference for everyday people and I will continue to vote to expand the Social Safety net for all of my family, friends and neighbors. Because under the new economic model we are following Medicaid expansion helps create more billionaires and I am okay with that. Medicaid expansion builds hospitals that sometimes are used by rich people too and I like that.
Modern economic theory means that all spending is good spending and helps increase stock values and the wealth of the rich and now that includes us.
What did this have to do with the article?
I share your sentiment and agree with every word you said.
Please Stop Bashing Billionaires.
Nobody Forces Anybody to Buy Anything.
Don’t buy a Tesla, or a Rocket, don’t tweet, and don’t buy whatever else Elon is Selling. Don’t Ever go On Facebook and Zuck will NEVER be a Billionaire. Don’t Ever buy Anything on Amazon and Bezos will NEVER be a Billionaire.
If you want those things, or anything else someone is selling, It is YOU who are creating Billionaires because they are simply providing things YOU want.
Go Bash Yourself or your neighbor for buying the things they want.
Sam,
Knowing your Investing philosophy, I’m somewhat shocked at your post. Not the fact you bought on Margin (many of us do it from time to time),.
But the fact that a) you didn’t know the Margin Rate, and b) you don’t reach out to Fidelity to negotiate a better margin rate.
A phone call or email is worth the try. I did a long time ago, and based on my account size, had little problem getting a lower rate. I’m guessing your portfolio would be strong enough for them to be reasonably accommodating towards you.
Shocking right? But now I know what the margin rate is.
I didn’t know what the margin rate was because I hardly ever buy stocks on margin. And I’m not gonna negotiate with them unless I decide to start buying stocks regularly on margin, which I won’t.
I just use it as a line of credit to ensure I continue to dollar-cost averaging, even if there is a cash flow mismatch.
Why do you buy stock on margin and what interest rate do you pay right now?
I’ve used Margin off and on for years…. and only when I think there is a sure thing (funny, right?). Years ago, I got too deep in; so now, like yourself, I only use it sparingly.
TDA>Schwab, now at 9.85% (When I negotiated it, I was offered 9%), so like everything else, it’s subject to upward creep. Haven’t used it for six months now.\; but I do so for short temr trades, maybe with Margin for a week.
Sounds good. How have your margin investments done? And are you also retired?
I’ve just found it difficult to go on margin once you’ve made enough money to feel content.
Why don’t open a LAL to fund the cash flow gaps of household expenses? Cheaper than margin…
Don’t need to because I have online income and can generate other side income like teaching tennis and writing books.
but because money is fungible, could have used a LAL draw to backfill the amount u invested and not paid the higher cost of margin.
Sounds good. What does a LAL cost and how have you used one to build more wealth?
Currently it’s S+125. I use right now solely to fund capital calls and short term needs (tuition before 529 checks came, tax payments, etc…)
I did 2 term loans in 2021 and 2022 at 5 and 7 years respectively both under 3 and invested in to earn positive carry (used to fund millennium, Point72, few private BDCs and some duration bonds/prefs when rates got much more attractive).
For reference a 5Y TL will likely be about 4.99 in Feb/March. Too high to look for positive carry, but might lock in some capital for future capital calls that I’m expecting.
Cool. Thanks for sharing. I’ve had surprise capital calls that have needed funding in a short time, and it would a been nice to have a line of credit to do so.
I think this is its best and highest use – ST draws that are sizable and short notice – but that can be repaid quickly via cash flow or portfolio rebalancing (or from distributions from alts)
Woah thanks for the heads up on Fidelity. I have an account there and didn’t realize that it could possibly dip into margin like that. I usually do my buy trades by inputting dollar amounts vs shares and cross reference my available cash balance but occasionally I forget to check. I’ll be sure to look very closely each time now so I don’t buy more than my existing cash balance.
Robinhood charges 6%! Not sure how Fidelity gets away with charging so much.
Very reasonable, if so! I’m not sure how Fidelity stays in business with RobinHood charging so little. But it also makes sense as there are a lot more speculators on RobinHood, so perhaps more volume.
It’s relatively easy to get any brokerage down to close to that interest rate. You just have to call them.
Good to know. I will the next time I find myself in this situation.
Wow! I had to look that up – Robinhood had always charged Extremely high margin rates that were a real profit generator for their business.
I have never dealt with them due to their very shady ways of operating. Their website even says they used to charge 12% but have recently lowered the rates to be competitive.
Thank you for sharing this article, timely since I have been seriously considering to use my Securities Backed Line of Credit (SBLC). I have a decent portfolio with a Wealth Manager. I have the ability to get an SBLC, likely between 5.3% (preferred) and 6.25%, I’m still negotiating with them. Let’s say I can borrow approx $4M (since only parts of my portfolio can be borrowed against, many of my Alt Investments cannot.
My current thought is to borrow approx 50%, $2M, then put it into some Private Credit Funds (strong track record of consistently paying 12% quarterly).
By not tapping all of my SBLC, I reduce the risk of any black swan events creating an urgent Call Event.
The arbitrage is very attractive and feels like missed opportunity cost for me over the past year…
Welcome any thoughts. As you can imagine, I get a lot of views on this one, a large group of folks that are risk adverse/conservative advise not to do it because the world may come to an end… My thought is if world comes to an end I have bigger issues, but definitely continue to explore all views.
For reference, total NW between 18-20M.
Welcome any thoughts here. Seems like another $80-100K potential just sitting there waiting to be gained.
My main concern for your situation is receiving a “margin call”, which Sam did not discuss here.
In your example, $2M is half of your available to borrow balance. Some equities cannot be borrowed against as you mention, other equities have a lower than 100% marginable percentage. And, when you purchase a marginable asset with the margin balance, your available to borrow balance increases.
Margin calls occur when your account has borrowed more money than what the brokerage has determined is a safe ratio of borrowed value to asset value. That ratio has a numerator and a denominator, and both of those numbers can change. During a financial crisis, the value of the marginable assets drop causing the current margin balance to approach your borrow limit. It is during these times when your actual risk tolerance is determined. Borrowing at 6% to receive a not-guaranteed 12% return seems like “free money” but the risk adjusted returns on that free money is probably not so great.
Borrowing only $2M of $4M available may seem like a buffer but it probably is not as big as you think. Brokerages have a nasty tendency to lower the marginability of some assets with little notice when there is a financial crisis, further reducing your margin balance at the exact time when you need the liquidity most. I personally try to never exceed 25% of my available margin and usually this is to smooth out low cash flow situations, as Sam mentioned.
Thank you for sharing your thoughts. My key take away is that I should consider to go down to 25% instead of 50%. Fair enough. Appreciate you taking the time to share
I should have wrote “Brokerages have a nasty tendency to increase the margin requirements of assets during a financial crisis”.
I try to focus on risk-adjusted returns. You could make 4% risk free in 3 month US treasury bonds. 5% in corporate bonds. Will an extra 1-2% of interest be worth it?
I don’t see the point, unless you find $20 million net worth is it enough? What is your ultimate net worth goal and how old are you? These variables are necessary to help make a better judgment.
Getting to a $30,000,000+ net worth is nice, but I promise you there is no difference between that and a $20 million net worth.
48 Yrs old. Wife (does not work), 3 kids in Private High School (college starting for the first one next year. Some ambitious (means expensive) list of schools choosing between). I am not currently working. I passed my retirement number some time ago, but inflation has been a real impact. I’ve looked at data from various HNW groups, and it seems that there is a clear breakpoint that happens at 25M. Annual Expenses are still a bit high, as with some of your examples, living in higher cost location / the kids / etc… so let’s round to $400K.
I don’t think there’s any need to borrow money to try to make more money if you want to get to a $25 million net worth.
All you need is several years of conservative 5 to 7% annual returns and you’ll get there.
Hang in there. $20 million might not feel like enough or your target net worth, but you’re almost there plus with what I’m assuming is a well-paying job.
50% is pretty high leverage. Private credit funds look good until another financial crisis hits. I almost went bust in the GFC with high levels of margin like that. Now I only borrow 10-15%.
Depending on firm, u can also term out SBLC/LAL draws – was great to create positive carry when rates were low. Usually they have attractive programs near tax time….