I am going to be very straightforward with my point of view on this topic. I can’t think of anything more risky and dangerous than borrowing money - outside of your regular means to pay back - to invest. We all know that we are living in a place where we can constantly offered to borrow money, regardless it is credit card, equity loan, or easy to access margin accounts. Some forms of these lending vehicles are offered to pay back with installments while margin account is not. Unfortunately in America, most of us are so addicted to borrowing money. We borrow for houses, cars, education, even a computer or refrigerator. Some of us are willing to pay almost 20% interest to credit card purchases. Per U.S. News, in 2016 July to Oct, U.S. Bank interest income increased by 9.2 percent, or $10 Billion, reach interest income to $112 Billion. Our government also encourage spending by taxing interests received and tax deductible on interest paid.
In some cases, borrowing money is good. We need a roof above us, we need money to invest in education, but borrowing money to purchase goods and make investment in stock market is a dangerous move. Using margin account to invest is equivalent to gambling, which is driven by greedy while trying to beat luck. Investment is an educated process. The purpose of investment is to build wealth through our research to understand the risk and return. However, nothing is more risky than a possible losing all your financial resources if you made a bad bet on one or two transactions through margin account.
We have seen especially in the past twenty years, some of the big banks and financial institutions came to bankruptcy because of the over leverage in lending money. If they can not even manage such high risk while owning the talents and resources much more than you do, what makes a normal investor think that you can manage that risk better.
Again, I strongly oppose to borrow money for unnecessary purchase or investment. Let’s invest with caution and controllable risks.