Don’t borrow money to invest, avoid leverage, and never buy assets you don’t understand

When you use borrowed money to buy stocks, any drop below a set threshold leaves you unable to add more funds, so your positions get automatically sold off. The paper losses instantly become real losses, leaving you no chance to wait for the price to rebound. Regulatory rules state that people who have held an account for less than six months or whose average daily assets over the past 20 trading days are under 500,000 RMB cannot open margin trading accounts. This threshold alone makes it clear this tool isn’t meant for ordinary investors.

Cost

Zero expense. The hard part is resisting the urge to “borrow some cash to make extra profits” when the market is doing well.

Benefit

Leverage essentially means borrowing money to make purchases, which also magnifies potential losses. After opening a margin account, the market value of your collateral may fall below the minimum maintenance margin set by your broker, which governs the assets you’ve pledged to them. If the value drops below this threshold and you fail to add more collateral to bring it back up, your positions get forcibly liquidated, with the broker selling them on your behalf. Paper losses turn into actual losses right away, with no window to wait for a price recovery. The same regulatory rules apply here: clients with less than six months of trading experience, insufficient risk tolerance, or average daily securities assets under 500,000 RMB over the past 20 trading days are barred from opening credit trading accounts. This requirement further proves it is not a suitable tool for regular investors (China, 2015).

Notes

There is no direct academic evidence supporting the advice “never buy assets you don’t understand”; this is widely accepted industry consensus, so it is classified as grade C. Using consumer loans or credit card cash advances for investing also counts as a form of leverage; their interest rates are covered in section 7 of this chapter (“avoid minimum credit card payments”). This content does not constitute investment advice.

Sources · 2

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）. 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）. sse.com.cn/services/tradingservice/margin/edu…