So far this week we have been talking about real estate-based investing. Today I want to share with you how borrowing money to invest in the stock market works.   Borrowing money to invest or “on margin"   Borrowing money to invest happens all the time. When you do so through a trading platform it is called “on margin”. For example, if you have a trading account with TD Ameritrade or any of the other online trading platforms they will allow you to borrow money to buy stocks with.   Lenders will also consider allowing the borrowing of money to invest. However, when a traditional lender does so they discount the value of those stocks heavily.   Cut in half   Let’s look at an example of how a lender, not a stock account, might lend you money.   For this example, we will assume that you have $100k in stocks in your trading account. Most lenders will provide you about $50k against that value in your stock account. That means that they are cutting the value of your account in half. Why is that?   Well, lenders know that the stock market can be extremely violative and they hedge their own bets by limiting the loan amount they will give you in anticipation that the value could drop quickly. I would say that is a lot of hedging, considering the last time the market dropped 50% was….well, it is extremely uncommon.   Another limitation the lenders use to protect their own position is by often only using the best of stocks as collateral. Here they may only count the value you carry in “blue chips” or well-established companies like Apple, Google, etc.    So, if your $100k stock trading account is made up of $20k in penny stocks then the lender is likely to only consider lending against the other $80k. Using the 50% loan-to-value average you are looking about only being able to get a $40k loan versus the original $50k in our example.