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

Margin debt is a huge part of that because he's basically borrowing money he doesn't have

to invest in other types of securities, other types of stocks.

So it's really that potential for big gains that you see a lot of investors jump into this.

I would say you've also seen it too because investors have these massive gains, like say stocks like Tesla, AMC, GameStop, they're up massively.

Investors don't necessarily want to sell those securities to say buy other stocks or if they need money to take out of their account to use for themselves.

So they use their margin debt to keep those securities in place, not to have to sell any of them.

And again, when markets are rising, that always seems like a pretty good option.

So I would say just this frothy market right now is a huge incentive to investors to borrow against their portfolios right now.

In a lot of cases, they have a lot of money in their securities accounts.

So it looks like, in a lot of cases, a source of funding for them for a lot of other things, and in some cases, beyond just buying stocks.

So the number in of itself, nearly a trillion dollars in margin debt, that in and of itself is a bit alarming to a number of analysts because it really does suggest that investors are losing sight of those bigger risks in the market.

The fact that there could be a massive bout of volatility, 10%, 15%, maybe even more of a drawdown.

And when investors lose sight of that, that's when you really do see that domino effect

sort of take hold in the market where there's a lot of selling going on because of it.

On the other hand, though, margin debt relative to the S&P 500's market cap is about 2.4%.

That's not as high as it's been in the past.

I mean, for example, leading into the 2008 financial crisis, margin debt was about 3%, or maybe even more, of the S&P 500 at that time.

But we're not far off, and it doesn't take a whole lot to say a period of stagnant markets

But continued borrowing can dramatically increase that percentage fairly quickly.

So it's not at a high level, but it's something I think a lot of analysts are watching, are being mindful of, just because retail investors have become such a powerful presence in this market over the last year.

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