Over the past nine years ago, investors like Jonah Engler have watched the stock markets rise. This has given people like him the opportunity to significantly increase their gains, particularly by making purchases on margin. However, there are now some indications that this could all change. In fact, some brokers and investments funds have suggested now is the time too sell those margins, because they could otherwise be wiped out.
Jonah Engler’s Review of Margin Investments
There is a staggering amount of money involved in margin buying, and particularly for the retail business and institutional industry. In fact, currently, some $642.8 billion has been borrowed against their portfolios. This makes financial sense because it has exposed them more to stocks. However, according to FINRA (the Financial Industry Regulatory Authority), this could eventually leave them in unmanageable debt.
There were two sessions where, perhaps on the back of investigations and allegations, the Dow tumbled by over 1,000 points. Years of gain were wiped out in an instant because brokerage firms suddenly made a slew of margin calls. It is very important, according to Jonah Engler, that investors in businesses or stocks are aware of the potential for this happening again, and what that could mean to individual portfolios.
Why Margin Borrowing Can Be Incredibly Dangerous
If an investor uses a margin loan, they effectively pledge some, or even all, of the stocks and bonds in their portfolio as a form of collateral to purchase other securities. Should the value of the stocks and bonds in collateral drop, which can happen quite often and quite significantly depending on what they are, a bank can tell the investor that they want their money back. This is a problem in a situation where the margin call does not get met. What happens in that case is that all the securities get sold, leaving the borrower in negative equity that they somehow have to repay.
Goldman Sachs has reported that, in 2017, the New York Stock Exchange’s total value was made up of 1.31% of net margin debt, as it is now referred to. They reviewed this using data going back all the way to 1980. During the tech bubble, in 2000, net margin debt was also high, at 1.27%. However, 2017 is clearly a record year.
Another issue that has been raised by investors like Jonah Engler, is that brokerage firms see lending against securities as a great way to make significant profits. This is because those are loans, and loans come with interest rates. The rate of interest o these loans is significant and makes up quite a large amount of the compensation that brokers receive. What this means is that they have a great incentive to extend new lines of credit, even if a client doesn’t really need to borrow.
Jonah Engler wants to urge investors to be cautious and he urges brokers to engage in responsible lending tactics. If not, there is a real chance that there will be a significant financial collapse again.
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