Margin is not your friend

Was just recording a podcast with ?? Sherry Jiang on personal finance, and thought that since I do talk a lot about it, whether it's budgeting, money management, investing and whatnot, that I could write about it a bit more consistently!

I've been trading for more than a decade now, and one thing that got me early on was leverage, or margin, the allure of borrowing money (you might not have), and using that to get more gains, but on the flipside, where you can lose a lot of money (which I have).

In my journey with trading, there have been lessons learned the hard way. The allure of leverage or margin trading is a double-edged sword, a truth I discovered early in my career. It's a tempting strategy – borrow money, perhaps more than you own, and use it to amplify your gains. But let's not forget, it also magnifies your losses, and I've been there.

• The Perilous Side of Leverage: The first time leverage really backfired on me was with a Chinese stock that eventually got delisted due to fraud. I still remember the sting of that loss – it wasn't just any money; it was the savings from my childhood Chinese New Year celebrations. Poof! Gone in one fell swoop. It was a harsh but invaluable lesson in the risks of margin trading.
• Leverage with Caution: Now, I'm not saying leverage is always bad. When used judiciously and in safer products, it can be a part of a sound investment strategy. But it's crucial to have the right time horizon to ride out the inevitable volatility. And a golden rule if you're considering using margin: never max it out. Always leave room to maneuver, because markets can be unpredictable.
• The Cost of Borrowed Money: Remember, there's a cost to borrowing money. Interest rates were relatively low a decade ago, making margin trading more accessible. However, with today's higher rates, the cost of borrowing has increased significantly. This means the threshold for profitability is higher, and the risks are amplified.
• Understand What You're Getting Into: It's easy to be lured by the potential of making quick money, but this mentality can be dangerous. Margin trading is not just about the potential gains; it's equally about the potential to lose – sometimes more than you own. It's essential to fully understand the risks and mechanics of leverage before diving in. Trading on margin isn't for everyone, and it's certainly not a pathway to easy wealth.

I'll say it again, margin is not your friend, so if and when you start trading stocks, do be careful!