Here is a good advice from Peter Lynch in his book, Learn to Earn:
The real victim of the Crash were the people who bought stocks with borrowed money or margin. In those days, you were allowed to invest with only 10 percent down. So if you had $10,000 you could borrow $90,000 and buy $100,000 worth of stocks. When the Crash cut the prices of your stocks in half, you were left with $50,000 worth of stocks and a $90,000 debt you couldn’t pay back.
What Investopedia says about margin?
A brokerage account in which the broker lends the customer cash to purchase securities. The loan in the account is collateralized by the securities and cash. If the value of the stock drops sufficiently, the account holder will be required to deposit more cash or sell a portion of the stock.
In a margin account, you are investing with your broker’s money. By using leverage in such a way, you magnify both gains and losses.
One Comment
I think the problem does not lie on whether or not the person uses stock margin facility but rather, whether or not that person has an effective risk management model.
If you use the margin facility but have an excellent risk management model, then the odds of you surviving the market is higher, no?