Introduction to Leveraged Trading: A Comparison of 4 Major Stock Borrowing Methods and Risk Management Guide

Stock market high returns are always enticing, and borrowing money to invest—also known as leverage—has become a quick way for many to get on board. But is borrowing more and more really the best approach? Today, let’s discuss this topic.

Why do investors choose to borrow money to buy stocks?

In fact, investors use leverage for many reasons. Some want to quickly bet on excellent opportunities, others release capital to explore other investment directions, and some use leverage for hedging to reduce risk. But don’t forget, leverage is a double-edged sword; it amplifies gains but also magnifies losses.

The dual nature of borrowing money for stocks: returns and risks

Returns:

If the cost of borrowed funds is low enough and the stock performance is strong, borrowing to buy stocks can multiply your gains. The stock market often sees short-term explosive bull stocks; capturing these opportunities with leverage can help maximize your returns. Additionally, borrowing money for investment allows you to free up principal for other asset allocations, improving capital efficiency.

Risks:

Borrowing money incurs interest, which directly eats into your investment profits. More troublesome is that losses are also amplified. When stocks perform poorly, you not only face a shrinking account but also the pressure to repay loans. If you use margin financing and securities lending, a sharp drop in stock prices can cause the collateral ratio to fall below the maintenance margin, prompting the broker to force sell your stocks, locking in losses. This psychological burden can often be heavier than the actual loss.

4 common ways to borrow money for stocks

Margin Financing and Securities Lending: Broker’s leverage products

Borrowing from brokers to buy stocks (margin financing) or short selling stocks (securities lending) is the most common method. Margin interest rates are about 5%-8%, suitable for experienced investors with higher risk tolerance.

Account opening requirements include opening a margin account, assets exceeding 500,000 yuan, and maintaining the account for at least 6 months. Margin buying can quickly amplify gains, but short selling carries greater risk—since stock prices can rise infinitely, your potential loss is theoretically unlimited.

Credit Loans: Banks’ options

Applying for a credit loan from banks for investment purposes, with annual interest rates around 8%-15%. No collateral is required, but rates are relatively high. Banks will assess your credit record and income stability.

This method suits investors with good credit and stable income. The downside is that if investment returns fall short of expectations, you still need to repay principal and interest on schedule, which may cause cash flow difficulties. Long-term reliance is not recommended.

Stock Pledge: Using stocks to get cash

Investors holding quality stocks can pledge their stocks to brokers or banks to obtain funds for investment. The annual interest rate is about 6%-10%, between margin financing and credit loans.

This is suitable for those planning to hold quality stocks long-term. The risk is that if the pledged stocks drop significantly in value, you may be asked to add collateral or face forced liquidation. Monitoring market fluctuations closely is very important.

Margin Trading: Derivatives leverage method

Trading by paying a portion of the contract value as margin, with annual interest rates around 5%-10%. Futures, CFDs, forex, and similar instruments fall into this category. Investors can flexibly go long or short.

This method is suitable for professional investors with high risk tolerance and familiarity with derivatives. In extreme market conditions, you may be asked to add margin or face forced liquidation.

How to choose a borrowing method? A comparison table to clarify

5 risk control tips for borrowing to invest in stocks

Tip 1: Calculate first, then act

Borrowing incurs interest. Before investing, you must know: if the annual interest rate is 5%, your investment return must exceed 5% to make a profit. Conversely, assess whether your investment strategy can reliably surpass this threshold.

Tip 2: Control leverage ratio

Debt ratio or leverage multiple should generally not exceed 50%, ensuring you have sufficient repayment capacity. Even with high risk appetite, avoid excessive leverage, as losses can be magnified and lead to margin calls.

Tip 3: Reserve emergency funds

Borrowing to invest means fixed repayment obligations. Be sure to set aside some cash for emergencies—unemployment, illness, urgent expenses. If you cannot repay on time, you may face penalties and damage to your credit record.

Tip 4: Strictly enforce stop-loss

Setting a stop-loss point is essential. Once the stock price hits your preset level, sell immediately—don’t hope for a rebound. The psychological pressure of borrowing makes stop-loss even more critical to prevent further losses.

Tip 5: Overcome emotional trading

Borrowing amplifies your psychological fluctuations, making chasing gains or panic selling more likely. The solution is: every investment should have a clear plan, strictly followed, to prevent emotions from interfering with decisions.

Final advice

Borrowing to invest in stocks can indeed accelerate wealth accumulation, but only if you have a clear investment strategy, sufficient risk awareness, and strict discipline. Leverage is not a cheat code; it’s an amplifier—amplifying your judgment but also your mistakes. Instead of blindly pursuing high leverage, it’s better to steadily master every aspect of risk control.