What is one risk involved with borrowing money to buy stocks?

Answer 1

The risks of buying goods on credit, such as using a credit card, are that a person's debt burden increases. As long as the amount owed is easily paid based on a persons monthly income, then there is no problem. It can become a problem if the individual loses their job. Then how will monthy payments be made becomes the question. The end result will be a bad credit rating unless suitable arrangements are made with the credit card company.

Buying stocks and bonds on margin is risky if the transaction is not closed out before the stock, for example goes into a steep decline. For example, if a stock is selling at $100 per share is purchased on 50% margin, the other 50% is lent to the buyer from the brokerage firm. That $50 per share draws interest. No one can borrow without paying interest to the lender.

In this example, here is the risk element. If the stock bought at $100 per share drops quickly to $25 per share and the investor decides it must be sold, the net amount to the investor is a $75 loss per share. The investor already owes the brokerage firm $50 plus interest. The net of $25 means the investor has lost $50 of his or her own money and must also pay the stock broker another $50 plus interest which was the amount loaned.

In the investor's account is $25. The investor has lost his or her $25 plus the $50 of the stock broker.

Now there is a debt of $50 the investor must pay to the broker, plus interest.

The bottom line is that a huge loss has been incurred by the investor.

Answer 2

You never see the money again. Or the person never pays it back, even if they gain thousands.

"Always get it in writing" Quote from a random laywer.