Remember when people were worried about margin debt? 😬
A bearish myth debunked 🫢
It used be popular to point to elevated margin debt levels as a reason to be worried about the stock market.
Margin debt is money that brokers lend to clients to trade securities. A trader can leverage their cash with margin debt to make bigger trades — and potentially earn bigger profits. The risk is the trader takes losses much more quickly than they would if they were trading without margin. In a worst case scenario, the value of their leveraged position falls so much it triggers a margin call, forcing the trader to sell.
About 10 years ago, as the stock market and nominal margin debt rallied to record highs, many bears warned that 1) the market’s gains were fragile because they were propped up by borrowed money, and 2) the market was vulnerable to a collapse because a little bit of selling could trigger cascading margin calls that would force more and more traders to sell. (For news coverage of these warnings, read this, this, this, this, this, and this.)
Lately, we haven’t heard much about margin debt, even as the stock market rallied to new highs.
Why?
