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Learning, Sharing, and Teaching => Investor Alley => Topic started by: mistymoney on December 30, 2020, 04:03:30 PM

Title: margin debt setting records.
Post by: mistymoney on December 30, 2020, 04:03:30 PM
https://ycharts.com/indicators/finra_margin_debt

https://www.investopedia.com/margin-debt-reaches-new-high-5093761

Thought? My first was - uh oh...

Other perspectives?
Title: Re: margin debt setting records.
Post by: EricEng on December 31, 2020, 01:26:07 AM
Interesting and related to the thread I had created recently on super cheap margin interest rates.  It is nearly free money, so makes since.
https://forum.mrmoneymustache.com/investor-alley/robinhood-margin-2-5-vs-mortgage-investing/
Title: Re: margin debt setting records.
Post by: MustacheAndaHalf on December 31, 2020, 07:22:56 AM
Margin loans 15% higher than 2 years ago is technically a record, but it doesn't seem that impressive.

Or maybe I'm downplaying it because I just went on margin ... to 1.01x

The cautions of that article are accurate.  If you buy leveraged ETFs on margin, they can very quickly swing against you and wipe out the whole account.  Someone who borrows an extra 100% on margin, and holds 3x ETFs is effectively 6x leveraged.

Consider a -17% drop.  The 3x ETF takes a -50% hit, which then brings the account to half it's original value.  But with 2x leverage from the margin loan, -50% turns into -100%.  The value of the account is equal to the margin loan, and so the account is liquidated to pay off the loan.  Net result, -17% and the account is wiped out.
Title: Re: margin debt setting records.
Post by: ChpBstrd on December 31, 2020, 08:27:52 AM
Those charts only go back to 2018. For a longer term perspective:

https://www.finra.org/investors/learn-to-invest/advanced-investing/margin-statistics (https://www.finra.org/investors/learn-to-invest/advanced-investing/margin-statistics)

Conclusions:

Use of margin has been steadily increasing over time, ranging from around 300B in 2010 to over twice that amount by 2018.
This is a very noisy metric, with huge intra-year swings the norm.