Should You Trade on Margin?

No. Why put yourself, your family, and your portfolio at risk? Margin can amplify gains, but it tends to magnify losses.

Today, let’s discuss the disadvantages of margin, safer ways to trade, and ways to invest by taking loans against your assets.

What is margin trading? Margin is a loan against your assets. Depending on credibility, you can borrow against 50-60% of your assets. We can call this leverage.

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For example, I have roughly $30,000 in my M1 Finance account. I can borrow around $10,000 against this portfolio at a 3.5% interest rate. 

We call this margin if I take this $10,000 loan and invest it back into stocks. You can use the same technique for cryptocurrencies. 

The bigger fool theory. The problem with margin is that you must believe the bigger fool theory. You are risking your portfolio with hopes of selling your asset to a “bigger fool.”

It’s always risky to depend on capital gains to make a profit. As we see with the stock and crypto markets, when emotions run high, volatility runs higher. You don’t want to trade on margin, especially when volatility is high.

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Margin calls. When the value of your assets decreases, you have to add money to ensure you keep your margin ratio aligned. If you fail to do so, the brokerage will issue a margin call and sell your assets to enforce the proper balance.

For example, my $10,000 loan was 33% of my $30,000 portfolio. If my portfolio drops to $20,000, I need to add $10,000 to maintain that 33% ratio. If not, the bank is going to get their pound of flesh.

Banks and brokerages do not like to lose money—of that, you can be certain. Playing with margin is like playing with fire; you are the frying pan.

Avoid margin at all costs. I see no reason to trade on margin. If you receive a hot tip but don’t have the money to play, don’t play. Becoming wealthy is about building a portfolio of assets slowly. 

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Learn how to invest for cash flow, not capital gains. Investing for cash flow consists of rents, dividends, and royalties. Capital gains are a nice secondary effect of investing, not a primary way to build wealth. 

A better way to leverage your assets. There are two much safer ways to leverage your portfolio via the world of stock market options trading. 

1. Selling covered calls. Selling covered calls means selling the right for someone to BUY your stocks at a specific price (the strike price).

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With “covered” calls, you own the stocks in your portfolio. If someone exercises their option, you get the premium of the options plus the higher price of the stocks—a win-win.

You keep the premium and the stocks if the buyer doesn’t exercise the covered call. You can then do the same thing next month—a win-win-win.

2. Selling cash secured puts. Selling cash secured puts gives the buyer the option to SELL you their stocks. The buyer would use these as insurance against their stocks decreasing in value.

For example, say the buyer owns McDonald’s (MCD) at an average cost of $50. The current price of MCD is $200, so the buyer buys a put with the strike price of $170. 

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You are selling the buyer insurance against a quick drop in stock price. If the price drops and they exercise the option, you would need to purchase MCD (x100) at $170. That equals $17,000.

A cash secured put means you have the $17,000 in your account and set aside if the buyer exercises the option. If they do not, you keep the premium.

Cash secured puts are a great way to build a portfolio of dividend stocks at low prices. You can SELL puts for low strike prices. If the buyer exercises them, you get blue-chip stocks at discount prices, plus the premium. I read about this strategy in “Make Your Family Rich.”

Taking a loan against assets. You should never trade on margin. However, taking a loan against your portfolio isn’t necessarily a bad thing. 

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It can be a boon to my wealth if I can take a reasonable loan against my stock or crypto portfolio and use it to invest in another asset class.

Let’s say I have $100,000 in my dividend portfolio. I take out $10,000 at 3.5% against my loan and buy a storage shed that I will rent.

I can use the cash flow from the storage shed to pay off the loan. After ultimately paying off the loan, I have my storage shed in an infinite return. Then I can rinse and repeat until I am rich—all while my stocks continue to grow.

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The creation of money. I created money by extracting $10,000 against my portfolio in this scenario. My stocks and cryptos are growing, as well as my storage shed business. I am using leverage to my benefit.

I also diversified my passive income and investment portfolio. Try not to use leverage in the same asset class or business when starting your journey.

If you are building a storage shed business, use leverage to start a vending machine or garden business. Using margin to buy more stocks is a double whammy, especially in a market downturn or recession. 

Conclusion. Margin and leverage are two vastly different ideas. Leverage is using someone else’s money to make a well-researched investment. Margin is gambling and speculation. 

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Currently, most of the world is “margin-called” from the swift drop in stock and crypto prices—meaning people are broke. However, I can assure you that margin will return in force during the next asset bubble. 

Don’t get caught in the hype of margin. It’s sexy, it’s easy, and it’s fast. However, on the way down, it is depressing and soul-draining. 

Invest only with the money you have. The stock market is an emotional roller coaster, and you don’t want your livelihood to depend on the emotions of other traders. Avoid margin at all costs!

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