Why More People are Borrowing Money to Buy Stocks

As with most loans, the margin agreement explains the terms and conditions of the margin account. The agreement describes how the interest on the loan is calculated, how you are responsible for repaying the loan, and how the securities you purchase serve as collateral for the loan. Carefully review the agreement to determine what notice, if any, your firm must give you before selling your securities to collect the money.

In truth, a lot of investors — yes, even the nitpickers — are probably using leverage to boost their returns. If you have a mortgage or car loan and simultaneously invest in a 401(k) plan or IRA, you are effectively using borrowed money to invest. It may not feel that way, but investing instead of paying down debt is the same thing as borrowing money to invest.

Buffett’s issue isn’t necessarily with leverage, but how you get it. If you can borrow on the same terms as Berkshire, you’d be quite wise to use leverage. But you can’t. I can’t. Very few people or companies can, which is why Buffett advises investors to stay away from leverage, even if he uses it himself.

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