The US Also Faces a 'Debt Investment' Boom... Record High in Margin Loans

November 797 Trillion Won... Surge in Stock Market Since March Leads to Increased Borrowing for Investment
Significant Rise in High-Risk, High-Return Product Investments Raises Concerns

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] Margin debt, which involves borrowing money to invest in stocks, has reached an all-time high in the United States. As global stock markets have shown a rising rally, margin loan balances in Korea have surpassed 19 trillion won for the first time this month. Meanwhile, concerns are growing in the U.S. over a significant increase in high-risk investments aiming for high returns, such as options trading focused on tech stocks and leveraged exchange-traded funds (ETFs).

According to data from the U.S. Financial Industry Regulatory Authority (FINRA) cited by the Wall Street Journal (WSJ) on the 27th (local time), the scale of margin debt in the U.S. this year reached $722.1 billion (approximately 797 trillion won) as of last month. This represents an increase of more than 50% since March, when the market was hit by the COVID-19 pandemic. It also exceeds the previous peak of $668.9 billion recorded in May 2018 by over $50 billion.

The expansion of margin debt is interpreted as a phenomenon resulting from investors borrowing money to secure profits amid the sharp rise in the U.S. stock market since March. Since the low point on March 23, the Nasdaq index has risen by 80%, while the Dow Jones and S&P 500 indices have increased by more than 60%. Tesla’s stock price surged nearly 700%, and shares of online video conferencing service Zoom and U.S. pharmaceutical company Moderna also rose by 450% and 530%, respectively.

James Angel, a professor at Georgetown University, said, "The market is currently excessively optimistic without basis. Investors are inferring from recent numbers, 'Wow, the market has risen a lot so far, and it will continue to rise.'" He added, "We have seen this situation before, and it did not end well." The WSJ reported that before volatility occurred during the dot-com bubble burst in 2000 and the global financial crisis in 2008, margin debt tended to reach its peak in advance.

Some argue that certain investors are borrowing more to buy additional stocks or exposing themselves to potentially massive losses by taking on high-risk methods in pursuit of greater profits.

In fact, the WSJ introduced individual investors who used margin loans to inject funds into the stock market. Bruce Burnsworth, an engineer from Nevada, invested $23,000 in Tesla stock options last year before retirement and earned $2 million. He later sold his house and took on debt to continue options trading. Mary Roberts, a 50-something individual investor living in Washington state, bought Tesla shares last year with her cash and retirement funds, and after seeing the stock surge this year, she started using margin loans for options trading for the first time. WSJ reported that she said buying Tesla stock changed her life.

The problem lies in the investment methods they chose. Concerns are growing as investments in options trading and leveraged ETFs, which offer high returns but also carry high risks, have surged. Options trading in the U.S. has increased by 48% on a daily average basis compared to the previous year. Funds invested in high-return, high-risk leveraged ETFs and inverse ETFs reached $14.3 billion this year alone, marking the second-highest level except for 2008 ($16.74 billion).

The WSJ pointed out that investors using margin loans pledge their stocks as collateral, and if the value of the collateral falls below an appropriate level, additional collateral may be required. It also explained that many investors are using margin loan funds for options trading and, in pursuit of profits, are choosing riskier strategies that could result in losses exceeding the amount they invested.

This content was produced with the assistance of AI translation services.