Leverage Investment Notice: Think Twice Before Using Borrowed Funds to Buy Stocks

When the market presents profit-making opportunities, many investors think of using leverage to amplify gains. However, before taking action, you must understand what kind of traps are hidden behind borrowing money to trade stocks.

The Temptation and Reality of Leverage

Investing in stocks with borrowed funds seems logical on the surface: if your investment return exceeds the interest on the loan, the difference is your profit. But the reality is much more complicated.

Leverage is like a double-edged sword. When the market moves in your expected direction, borrowing funds can indeed increase profits. When you find high-quality investment targets, many investors choose to add leverage to maximize this opportunity, and some even use leverage for hedging, such as short selling to reduce overall portfolio risk. But the problem is, this sword also doubles your losses.

Interest payments are often overlooked by beginners. If your borrowing rate is 5%, your investment return must be at least over 5% to start making a profit. Plus transaction costs and taxes, the threshold is not low.

Four Ways to Borrow Money to Buy Stocks

There are various methods to achieve leveraged investing, each with different risks and costs.

Margin Financing and Securities Lending:

Borrowing funds from a broker to buy stocks is the most common approach, with annual interest rates typically between 5%-8%. However, this method requires meeting margin requirements—you need to have an account open for more than 6 months and assets exceeding 500,000 yuan to qualify for most brokers.

Securities lending involves borrowing stocks to short sell. In theory, if you predict stock prices will fall, you can sell first and buy later to profit from the difference. The problem is, losses are unlimited—how high the stock can rise, how big your loss can be.

Bank Personal Loans:

This is the lowest threshold but more expensive, with annual interest rates around 8%-15%. Banks only consider your credit record and income level, no collateral needed. The cost is higher interest, and you must repay on time. If investments go poorly, you still carry the repayment pressure.

Stock Pledge:

If you hold high-quality stocks and do not plan to sell in the short term, you can pledge them to brokers or banks for cash. The interest rate is between financing and personal loans (about 6%-10% annually). The biggest risk is that if the pledged stocks drop significantly in value, you may be forced to liquidate.

Margin Trading:

Using derivatives like futures, CFDs, or forex for leverage. This method offers the highest flexibility, allowing both long and short positions, with annual interest rates around 5%-10%. But it’s not suitable for beginners—extreme market volatility can trigger forced liquidation instantly.

Comparison of the Four Borrowing Methods

Why Borrowing Money Increases Risks

The first common mistake beginners make is overestimating their predictive ability. Borrowed funds increase psychological pressure exponentially. Watching stock fluctuations, since the money is borrowed, you are more prone to forced liquidation decisions.

The second trap is the snowball effect of leverage. For example, with 50% leverage (i.e., 1:2 leverage), a 50% decline in stocks will wipe you out. If the price drops to trigger the liquidation line, the broker will forcibly sell your holdings, forcing you to realize losses at the worst possible price.

The third real issue is cash flow pressure. Regardless of investment performance, you must pay interest and principal every month. If you encounter unemployment, medical emergencies, or other unexpected events, you may lack the ability to repay, ultimately leading to a credit crisis.

How to Use Leverage Safely

Step 1: Calculate Costs Clearly

Before borrowing, you must calculate the costs. A 5% interest rate means you need to beat 5% to profit. If the overall market volatility is low or your stock-picking ability is average, this 5% might eat into your profits.

Step 2: Control Leverage Ratio

Industry advice suggests keeping debt ratios below 50%. Even if you are confident in your abilities, avoid higher leverage. Higher leverage means less room for stop-loss, increasing the chance of forced liquidation.

Step 3: Reserve Emergency Funds

Borrowing makes your cash flow tight. Always keep enough emergency reserves to handle unexpected situations. If you cannot repay on time, you will face penalties and damage your credit record.

Step 4: Set Stop-Loss Points

This is the most crucial risk control measure. Decide on stop-loss levels before buying; if the stock price falls to that point, sell immediately. Don’t wait or rely on luck. Emotional trading is the most common cause of failure in leveraged investing.

Step 5: Develop an Investment Plan

The psychological pressure of borrowing can tempt you to chase gains, sell prematurely, or trade frequently. The solution is to write a plan before investing—specify which stocks to buy, why, and when to sell. Then try to follow the plan strictly, reducing impulsive decisions.

Final Advice

Borrowing money to invest in stocks is not entirely impossible, but it is definitely not a shortcut to quick wealth. Statistics show that retail investors using leverage have a much higher loss rate than those who do not.

If your capital is small and interest costs are high; if your experience is limited, leverage will magnify your decision errors. In such cases, honestly investing with your own funds, gradually accumulating experience, might be a more practical choice. Borrowing to buy stocks tests not only your stock-picking skills but also your capital management, psychological resilience, and risk awareness. Before proceeding, make sure you are prepared in all three aspects.