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Life Guide U.S. essentials
English

Don't borrow to invest, don't use leverage, and don't buy what you don't understand

  • High value
  • Evidence B
  • Saves money
  • Free
  • Takes minutes
  • Some willpower

In plain words

If you borrow to buy stocks and the price falls below the line and you can't put in more money, you are forced to sell. The paper loss turns into a real loss on the spot, with no chance to "wait for it to come back." The regulations say that someone who has had an account for less than half a year, or whose average daily assets over the last 20 trading days are under 500,000 (50万) CNY, cannot open a margin account. That threshold itself shows it is not meant for ordinary people.

Cost

Free. The hard part is holding back from thinking "borrow a little to earn a little more" when the market is good.

What you get

Leverage means buying with borrowed money, and it magnifies losses. After you buy on margin, the market value of your collateral may fall below the maintenance margin ratio line. This line is drawn by the broker and governs what you have pledged to it. If it falls through this line and you can't add collateral to make it up, you are force-liquidated, and the broker sells for you directly. The paper loss turns into a real loss on the spot, with no chance to "wait for it to come back." The regulations say that clients who have "traded securities for less than half a year, lack the capacity to bear risk, or whose average daily securities assets over the last 20 trading days are below 500,000 (50万) CNY" may not open a credit account. That threshold itself shows it is not a tool for ordinary people (China, 2015)

Notes

The line "don't buy what you don't understand" has no direct support in the literature and is common consensus, so on its own it is rated C. Investing with consumer loans or with credit card cash-outs is also disguised leverage; for their interest rates see §5.7 (don't make only the minimum credit card payment). This is not investment advice.

Evidence grade
B : Supported by research but without a precise number, or based on small or single studies.
Sources
  1. 中国证监会 (2015). 证券公司融资融券业务管理办法（证监会令第 117 号，第十二条）. https://www.csrc.gov.cn/csrc/c106256/c1654005/content.shtml
  2. 上海证券交易所. 《上海证券交易所融资融券交易实施细则》解读（投资者教育材料）. https://www.sse.com.cn/services/tradingservice/margin/edu/c/10074042/files/a1f1c4833302451fb9130dbb94116c56.pdf

Translated from the Chinese original. Original book, section 5, tip 16. This section is about money and spending. It is general information, not financial or investment advice. Content may be out of date and rules differ by place. When you actually deal with an agency, a doctor or a court, follow what local officials, doctors and lawyers tell you. Disclaimer