Why is borrowing money to invest risky?

Borrowing money to invest is risky because leverage cuts both ways: it magnifies gains exactly as much as it magnifies losses, and it does so on a clock you do not control. In a margin account the broker lends you part of the purchase price and holds your securities as collateral. If the position drops, your equity shrinks twice as fast as the price — and once it crosses a threshold, the broker issues a margin call.

The 25% rule is the part most retail investors don’t internalize. FINRA’s margin rule requires that equity in a margin account holding margin stocks stay at or above 25% of the current market value of the securities. Fall below, and the broker can issue a margin call demanding additional cash or securities, often within days. If you can’t meet it, FINRA notes the firm may sell your holdings — without waiting for you to recover or asking your permission. A temporary dip can become a permanent loss because the broker, not you, picks the exit moment.

This is not a hypothetical. FINRA’s published margin statistics show U.S. margin debt has hovered around $1.2 trillion in recent monthly readings (December 2025: roughly $1.225 trillion in margin debt on $211 billion in margin equity), meaning a large pool of retail investors is currently exposed to this exact mechanism. A 2023 study in the Quarterly Review of Economics and Finance found that the likelihood of a margin call declines sharply with investment literacy and rises with risk tolerance — i.e., the people most drawn to margin are the most likely to face a forced sale.

The other cost people underweight is interest. Margin rates typically run 8–12% annually depending on the broker and balance. Even if your investment holds flat, you owe that interest to the broker, eating into your principal every month. Combine that with the forced-sale risk, and the practical question becomes: are you borrowing to invest because you expect returns high enough to outpace interest plus survive a 25%-of-value drawdown without flinching? If the honest answer is no, the much safer path is dollar-cost averaging into a diversified fund with cash you already have, and accepting slower compounding in exchange for not having someone else’s clock run on your positions.

Margin can be a real tool for short-term, experienced traders with strict risk rules. For long-term wealth building, it is almost always the wrong instrument — leverage against an asset class (like U.S. equities) that has historically averaged ~10% nominal returns but routinely drops 30%+ in bear markets is a math problem more than a strategy problem.

For most investors the better path is straightforward: build cash in a short-term savings bucket first, then deploy that cash into a diversified fund on a fixed schedule — the same discipline that powers a CD ladder applied to your investment timeline. Slower compounding, but no one’s clock but yours.