Margin Trading

The math

An investor puts up $10,000, borrows another $10,000, and buys $20,000 of stock. The stock falls 30%.

The position is now worth $14,000, but the loan is still $10,000, so equity has dropped to $4,000: a 60% loss of the investor’s own money on a 30% decline. Meanwhile the loan accrues interest, commonly 8% to 12% annually, so the borrowed $10,000 costs around $1,000 a year just to hold.

If equity falls below the broker’s maintenance requirement, typically 25% to 30% of position value, a margin call forces new cash or immediate liquidation at whatever the market offers.

The trap

The forced sale is the killer, not the leverage arithmetic. Margin converts a temporary decline into a permanent loss by taking the decision out of the investor’s hands at the worst possible price; the broker sells to protect the loan, not the client.

Declines of 30% arrive roughly once a decade in the broad market and far more often in individual stocks, so the scenario above is not a tail case. It is a scheduled event with an unknown date.

The move

This site’s position is blunt: long-term stock picking works without leverage, and margin removes the one advantage the patient investor holds, the ability to wait. A holder with no debt can sit through any drawdown that leaves the business intact; a margined holder can be right about the company and still be liquidated.

The practical uses that remain are narrow, brief settlement bridging rather than standing leverage, and the working reflex is simpler still: compounding only works on capital that survives.