Investing on margin can be risky but there are some ways to reduce your exposure. Instead of using the maximum 50 percent margin, you might use 20 percent or 25 percent margin. That is, put up $15,000 or $16,000 in cash instead of $10,000 to buy $20,000 worth of stock. With less margin, the risk of a margin call is reduced, yet you’ll still have the potential for boosting your long-term returns.
Margin investing also may help you reduce risk in your portfolio. Suppose, for example, your portfolio is heavily weighted toward one stock. If that stock should fall sharply, your net worth would be depressed. You’d like to sell shares and invest elsewhere, but your concentrated position is so highly appreciated that any sale will generate a substantial tax obligation.
In this situation, you could borrow on margin and use the proceeds to diversify. Borrowing the money won’t trigger a tax bill, and the interest payments may be deductible.
If the other securities you acquire increase considerably in value, you’ll benefit from the appreciation. If those securities lose value, you can harvest capital losses and take offsetting gains on the concentrated position, without having to pay tax.