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

https://ycharts.com/indicators/finra_margin_debt
https://www.investopedia.com/margindebtreachesnewhigh5093761
Thought? My first was  uh oh...
Other perspectives?

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/investoralley/robinhoodmargin25vsmortgageinvesting/

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.

Those charts only go back to 2018. For a longer term perspective:
https://www.finra.org/investors/learntoinvest/advancedinvesting/marginstatistics (https://www.finra.org/investors/learntoinvest/advancedinvesting/marginstatistics)
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 intrayear swings the norm.