Margin Use Could Wipe Out Retail Investors’ Portfolios

During the past nine years of a rising stock market, investors have juiced their gains by buying on margin.  Buyer beware, those gains could be wiped out in an instant. The amount of money at risk is staggering. Retail and institutional investors have borrowed a record $642.8 billion against their portfolios as they try to pocket bigger gains by ramping up exposure to stocks, according to a recent alert from the Financial Industry Regulatory Authority, or FINRA. Unfortunately, those investors were left wide open and exposed when the Dow tumbled more than 1,000 points during two separate sessions. A slew of margin calls by brokerage firms erased years of gains and then some. Here’s why borrowing on margin can be so dangerous, according to a recent scenario in the Wall Street Journal. When using a margin loan, an investor would pledge all or part of a portfolio of stocks and bonds as collateral to buy other securities. If the value of the collateral shrinks enough,…

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