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The Wall Street Journal: Investors Big and Small are Driving Stock Gains with Borrowed Money

April 07, 2021
Image for The Wall Street Journal: Investors Big and Small are Driving Stock Gains with Borrowed Money

Article by Alexander Osipovich and David Benoit in The Wall Street Journal

Investors are borrowing huge sums of money to buy stocks. Is that a problem?

The “everything rally” that started in stocks last year has been boosted by investors betting money they’ve borrowed. That includes both small players like the day traders on Robinhood Markets Inc. and heavyweights like Archegos Capital Management, the investing firm that triggered a mini meltdown for several companies’ stocks.

As of late February, investors had borrowed a record $814 billion against their portfolios, according to data from the Financial Industry Regulatory Authority, Wall Street’s self-regulatory arm. That was up 49% from one year earlier, the fastest annual increase since 2007, during the frothy period before the 2008 financial crisis. Before that, the last time investor borrowings had grown so rapidly was during the dot-com bubble in 1999.

Some analysts say run-ups in margin debt contribute to bubbles, and they fear that today’s levels of borrowing will hurt investors if the market has a downturn.

“It fuels bull markets and it exacerbates bear markets and to a certain extent you put it on the list of irrational exuberance,” said Edward Yardeni, president of consulting firm Yardeni Research. “The further that this stock market goes, the higher that margin debt will go, and when something blows up that will be one of the factors for why stocks are going down.”

Some regulators have voiced concern about investors taking on too much leverage, the broad term for when investors put on big trades with a relatively small amount of money, usually by borrowing.

Leverage combined with internet hype can be dangerous, the Commodity Futures Trading Commission said in a notice to investors Tuesday. “Speculative short-term trading is always risky, but mixing it with unfamiliar products and markets, leverage, and advice from anonymous individuals is a recipe for disaster,” the CFTC said.

 the largest players often use other tools to amplify their bets, like derivatives. The degree of leverage used in such trades isn’t tracked in public data, and it often comes to light only after .....

To read this article in The Wall Street Journal in its entirety, click here.

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