Analysts warn that the increase in margin loans—borrowing to buy stocks—exacerbated the selloff that occurred at the end of last month and that, if such debt levels continue to rise, it could lead to more market volatility. This according to an article in The Wall Street Journal.
The article cites FINRA data showing that retail and institutional investors have borrowed a “record $642.8 billion against their portfolios” in an effort to participate in stock market gains. But when the market tumbles and the value of stock collateral shrinks, the penalties that investors face from brokers can “deepen the rout,” the article explains.
Margin debt has been increasing for years, the article notes, “and is generally considered a gauge of investor confidence. The long-running stock rally has helped push debt levels higher since investors tend to be more willing to take loans against investments that are rising in value. However, it can also precipitate a steep market downturn as it did before the burst of the dot-com bubble and the financial crisis of 2008.”
Some brokerage firms are attempting to protect investors by limiting those who use margin debt from participating in risky strategies that could expose them to heavy losses, citing Bank of America Merrill Lynch and E*Trade Financial Corp. as examples.