The Risks of Margin Borrowing for Everyday Investors
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What is the main topic discussed in this episode?
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Here's your money briefing for Tuesday, November 30th. I'm J.R.
What is margin borrowing and how do brokerages let investors use it?
Whalen for The Wall Street Journal. Friday's stock market sell-off followed by Monday's rebound is another indication that investing in the market can be a bumpy ride. And it's especially perilous for investors who have borrowed against their existing stock portfolios to buy even more stocks.
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.
On today's show, our markets reporter Michael Wursthorn will join us to discuss the growing trend of margin investing among individual traders and the risks they face when the markets take a sudden turn. That's after the break.
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How much can an investor typically borrow on margin and what are the mechanics?
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More investors are using borrowed funds in a tactic known as margin borrowing to score gains in the stock market. The rewards can be substantial, but so can the risks. WSJ Markets reporter Michael Wurstorn is here to talk about it. Hey, Michael, thanks for being with us.
Thanks for having me.
So, Michael, let's start with you helping us understand exactly what margin borrowing is. How does it work?
Why has margin debt climbed recently — which market trends are driving it?
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.
Okay, so let's get into the nuts and bolts of this. When people borrow money to buy stocks, how does that work?
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.
Now, Wall Street regulators say that margin borrowing was up 42% in October from a year earlier. Why are more people doing this?
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.
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Chapters
8 chapters
1
What is the main topic discussed in this episode?
0:00–0:39
2
What is margin borrowing and how do brokerages let investors use it?
0:39–1:22
3
How much can an investor typically borrow on margin and what are the mechanics?
1:22–2:15
4
Why has margin debt climbed recently — which market trends are driving it?
2:15–5:01
5
What are the immediate risks of using margin when the market drops?
5:01–6:54
6
How do margin calls work and what happens if you can’t meet one?
6:54–9:45
7
Why are younger retail investors particularly exposed to margin-related risks?
9:45–11:12
8
What have individual investors experienced when using margin to boost returns?
11:12–11:36
Speakers
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