"Margin accounts also open an investor up to something called rehypothecation risk. Rehypothecation occurs when a debt-issuer uses the collateral from the debt agreement.8 With a margin account, your securities are all considered collateral, and your brokerage may choose to use them as collateral for their own transactions and investments. When a piece of collateral is used for multiple transactions, it creates a "collateral chain" that connects more people to the same piece of collateral.

In a perfect world, there's no harm done by rehypothecation—everyone honors their debt payments and the collateral never has to be seized. However, collateral chains add to the fragility of financial markets. If one of those transactions goes bad, it can spark a domino effect that takes down more people than just the two parties involved in a single transaction."