Want to amplify stock returns? First, understand what financing means before taking action.

Stock investing may seem simple—buy and hold for dividends. But true trading experts never rely on a single approach; they utilize various tools flexibly based on market trends—financing is one of the most common. But what does financing mean? Many people only know it can amplify gains, but they don’t realize it also magnifies losses. This article will take you deep into the mechanics of financing and securities lending, and how to avoid the pitfalls.

What does financing mean? Simply put, borrowing money from a broker to trade stocks

Most people take out loans when buying a house to avoid paying all at once. The same logic applies to buying stocks. Financing means you put in a portion of the money, and the broker provides the rest to buy stocks, with the stock serving as collateral. What are the benefits? Participating in stock price movements with less capital, in other words, leveraging small funds for big gains.

For example, suppose you are bullish on Apple stock, currently priced at $100. You only have $40 of your own, so you decide to finance the rest. A few days later, due to strong pre-orders for a new product, Apple’s stock rises to $150. You sell and get back about $90 (after deducting $60 in financing interest). Note that Apple increased by 50%, but your profit is 125%. That’s the power of financing.

But this power is a double-edged sword. If the stock falls, your losses are similarly magnified.

How is financing cost calculated? Interest can eat up a significant portion of gains

Since financing involves borrowing money, interest must be paid. The annual interest rate in Taiwan’s securities market typically ranges from 4.5% to 6.65%. How is this interest calculated? Daily basis.

Suppose you finance NT$1.2 million to buy a stock priced at NT$2,000. After holding for 20 days, the stock rises to NT$2,200 and you sell. The interest payable is approximately NT$4,372 (NT$1,200,000 × 6.65% × 20 days ÷ 365 days). After deducting interest, you get your real profit.

Financing interest = financing amount × annual interest rate × borrowing days ÷ 365

Because interest erodes returns annually, financing is usually a short-term strategy and not suitable for long-term holding. For dividend-yielding stocks with only 4-5% yield, using financing to buy them isn’t worthwhile—the interest can wipe out the dividends.

Amplifying gains is an illusion; margin calls are the real threat

The most terrifying aspect of financing is a margin call. When a broker lends you money to buy stocks, they fear that if the stock price drops, they can’t recover the loan. So they set a “maintenance margin” threshold. If the stock price falls below this level, they notify you to add collateral.

For example: XiaoXiong financed to buy TSMC at NT$500, investing NT$200,000 himself and borrowing NT$300,000. The initial maintenance margin is 166.7% (50 ÷ 30).

Later, due to geopolitical risks, TSMC’s price drops to NT$380. The maintenance margin falls to 126.7% (38 ÷ 30). The broker gets nervous. They’re not just threatening; they’re genuinely worried about recovering the NT$30,000 loan. They notify XiaoXiong to top up the margin within 2 days, or they have the right to forcibly sell the stock—that’s a margin call.

There are two ways to meet a margin call:

First: Top up to maintain a margin of over 130%. The broker won’t sell immediately, but if the stock continues to fall and the margin drops below 130%, they will notify you again.

Second: Top up until the margin returns to over 166.7%. Essentially, returning to the initial state.

During volatile markets, you often hear news about “margin calls” or “stocks facing mass margin liquidation”—these are the situations described above.

Want to profit from financing? Choosing the right stocks is more important than anything

How can you avoid risks? The core points are:

First, stock selection. When financing, choose stocks with good liquidity and large market capitalization. If you pick a small-cap stock, during black swan events, it might plunge sharply and then rebound, but your stock could be margin-called or impossible to sell when you want to cut losses.

Second, timing. It’s best to enter before major positive news releases, when the stock price hasn’t entered a strong upward phase. Don’t chase high; position at relatively low points.

Third, discipline. Set stop-loss and take-profit points. Stop losses immediately if support levels are broken; take profits when resistance levels are hit and cannot be broken. Don’t rely on luck—markets are ruthless.

Another technique is to buy in batches. Suppose you believe a stock will rise but can’t precisely predict the bottom. You can buy gradually, spreading your funds via financing. The first purchase at the lowest point is ideal. If it continues to fall but you’re confident, you can add second and third batches. As long as the stock eventually rises, you profit.

This approach also diversifies risk and allows you to hold 2-3 stocks simultaneously. If all go well, great; if one consolidates while others rise, you still gain overall.

Securities lending (short selling) is the opposite of financing, with higher difficulty

If financing is a tool for bullish profits, securities lending (short selling) is for bearish profits. Financing involves borrowing money from a broker to buy stocks; securities lending involves borrowing stocks from a broker to sell.

Collateral is usually cash, typically 90% of the stock’s market value. The logic is simple: if you predict a stock will fall or is overbought, you borrow the stock to sell, then buy it back after the price drops and return it to the broker. The difference is your profit.

But securities lending has specific risks:

First: It has a time limit. In Taiwan stocks, before dividends or shareholder meetings, securities lending must be forcibly closed. So you must watch the “last day for securities lending” closely—don’t get caught by time.

Second: Forced liquidation risk. If the stock price doesn’t fall but rises instead, you start losing money. Brokers also fear you can’t buy back the stock, so they set a maintenance margin. If the margin falls below the threshold, they can forcibly buy back the stock. How much you get back depends on your remaining collateral.

Third: The risk of being “嘎空” (short squeeze). This is the cruelest. Some investors seek stocks with high short interest to push up prices. When the stock rises, short sellers are forced to buy back, pushing the price even higher, and locking in profits. Passive short sellers get caught in this trap.

Therefore, before short selling, you must check the stock’s short interest and understand the risk of a short squeeze.

The highest level of investing is still understanding the market

Whether it’s financing or securities lending, they are just tools. The real determinant of your success is your understanding of the investment target and overall economic conditions. Coupled with technical analysis to judge price movements, you can find suitable entry points.

Both financing and securities lending carry risks, but proper use can bring substantial returns. The key is to understand what financing means, what securities lending means, how they operate, and their risk boundaries—not blindly chase amplified gains. Managing risks with discipline and strategic execution is the long-term winning formula in the stock market.