Investors are borrowing against their portfolios at record levels, according to FINRA data about debit balances in margin accounts. As of November 2020, investors borrowed more than $722 billion against the value of their accounts. This is an increase from $561 billion in January 2020. According to FINRA’s data, the previous high of nearly $669 billion was in May 2018. You can see several years of margin data from FINRA here.
Trading on margin means an investor uses assets in his or her portfolio as collateral to borrow money from a brokerage to make more trades. The borrowing is not free—the investor pays the brokerage interest on the borrowed money. Margin trading increases an investor’s purchasing power and at the same time increases the size of potential losses. Losses can even exceed the amount invested. If account assets fall below a threshold, the brokerage will make a margin call and require the investor to deposit more cash. If the investor does not, the brokerage will sell the shares purchased on margin and other assets in the account to try to meet the margin requirement.
For many investors and retirees, trading on margin adds unnecessary risk. Margin trading may be unsuitable and not in an investor’s best interest. For investors who depend on income from investments or do not have cash or other liquid assets to cover a margin call, trading on margin is especially risky.
In November 2018, FINRA published an article for investors titled, “Know What Triggers a Margin Call.” With margin borrowing at record levels, that article is worth revisiting.