Michael Wursthorn

speaker

1,567 appearances 29 recordings 1 series first heard Jul 2017 last heard Nov 2021

Michael Wursthorn’s voice in public audio — every appearance, attributed to the second.

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WSJ Your Money Briefing · The Risks of Margin Borrowing for Everyday Investors · 30 Nov 2021 podcast

When you have markets going up the way that they are, it can create this perception that markets can only go up.

And that's why you do see these sharp increases in margin debt borrowing during times such as this.

Thanks for having me.

Most brokerages allow investors to borrow against their investment portfolios.

So they're pledging their stocks, bonds, any other securities they might own to access debt from their brokerage to buy more stocks, or they can use it to fund other daily purchases, whether it's buying a car or even if they want to, say, pay monthly bills.

But it's all pledged against their securities that they own.

Most brokerages require you to have at least $2,000, whether cash or securities, in your account, and that gives you access to margin debt.

Usually, you can borrow about around 50% of that pledged capital.

So in the case of $2,000, you have access to about $1,000 of debt from the brokerage to do with as you please, basically.

So there's two things feeding into that year-over-year increase.

One of them is the simple fact that prices in the stock market have increased significantly over the last year.

So that increases the pledged capital, but that's also going to increase the amount of margin debt that investors have.

Generally, when stocks are higher, margin debt's higher.

We've seen it just run up quite significantly for another reason, though, too.

And that's just because after March 2020, when COVID had hit,

margin debt and the markets fell precipitously.

So we've seen very high numbers year over year, almost this entire year, as the market's made a recovery and investors have gotten way more active in the stock market on top of that.

With interest rates being where they are, that's made fixed income securities, a lot of other assets, not nearly as desirable as stocks.

Stocks have, across the board,

increased significantly.

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