Borrowing money to invest! What could go wrong?

**Jurrien Timmer** (0:01)
NPR.

**Wailin Wong** (0:06)
Hey, Ricky.

**Adrian Ma** (0:07)
Hey, Waylon. Tell me, what could you do if you wanted to invest 100 bucks in Apple stock, but you only had $50?

**Wailin Wong** (0:15)
Oh, I know the answer. You are talking about margin trading, right?

**Adrian Ma** (0:20)
Absolutely.

**Wailin Wong** (0:21)
I could set up a margin account with my brokerage firm, put my 50 bucks in there, and then they could lend me the other 50 bucks. Of course, at a very high interest rate, and then I could buy that stock.

**Adrian Ma** (0:33)
Let's rip some day trades. Absolutely right.
Investors in the US stock market are making a lot of these margin trades these days. The total amount of borrowing is at an all-time record level over $1.5 trillion. That's up by 50% from a year ago.

**Wailin Wong** (0:51)
Woof. That is a lot of leverage. This is The Indicator from Planet Money. I'm Wayland Wong.

**Adrian Ma** (0:56)
And I'm Ricky Mulvey. Today on the show, when margin trading goes wrong, how these bets unwind, and why a debt-fueled stock market crash in South Korea could be a cautionary tale for the US stock market.

**Wailin Wong** (1:21)
The amount of margin debt at US brokerages is now greater than the total amount of American credit card debt. More money is being borrowed to play with the stock market than we've racked up on our amexes.

**Adrian Ma** (1:32)
And making profits with other people's money is great. The problem is when markets go down. You still have to cover that loan and the interest.

**Heather Tuuk** (1:40)
If the price of the stock goes down too much, you have two choices.

**Adrian Ma** (1:44)
That's Heather Tuuk, a finance professor at Yale.

**Heather Tuuk** (1:47)
You can either sell the stock to start to pay down that loan or post more margin to your account, that is infuse more capital into your margin account.

**Wailin Wong** (1:59)
In other words, Heather says, put up more cash or be forced to sell investments to cover the loan.
In the US, investors can use margin trading for pretty much any stock, but it's different in India. So Heather and her co-author decided to take a look at how margin trades play out there.

**Heather Tuuk** (2:15)
In India, the regulators were in some ways kinds of academics and that they designed rules that made studying this question a lot easier.

**Adrian Ma** (2:25)
Easier because there's a dividing line in India between stocks that can be bought with margin and others that can't. She says that made it a great place for a natural experiment on whether margin trades cause market instability.
What they found was, yes, margin mattered, especially during a financial crisis.

**Heather Tuuk** (2:43)
It's during those down swings that we get this amplification.

**Wailin Wong** (2:48)
The margin basket of stocks went down significantly more than the basket of non-margin stocks during the crisis. Many margin sellers were forced to sell their investments to cover loans. This forced selling helped amplify overall losses.

**Adrian Ma** (3:01)
A similar phenomenon just happened in the South Korean stock market.

**Wailin Wong** (3:05)
Right. Investors there are excited about two companies, SK Hynex and Samsung. They make memory chips for AI data centers, and as you've covered on the show, lots of demand for these chips right now.

**Adrian Ma** (3:17)
SK Hynex and Samsung dominate South Korea's stock market. The value of both companies skyrocketed is more investors got excited about their chips.

**Jurrien Timmer** (3:25)
This thing is so big and it's moving so fast.

**Wailin Wong** (3:28)
That's Jurrien Timmer, Director of Global Macro at Fidelity Investments.

**Jurrien Timmer** (3:32)
Semiconductor earnings have tripled in the last year. Like, it's crazy. Everything is sort of in fast forward and is just multiple dimensions more of what we might typically see in a boom bust cycle.

**Wailin Wong** (3:44)
Earlier this year, South Korea legalized single stock leveraged ETFs. These look just like a normal ETF on the outside, except there's extra leverage, futures, and various other financial tricks on the inside to multiply your returns. What could possibly go wrong?

**Adrian Ma** (4:01)
Yeah, there's a downside. Is that if the ETF loses value, the losses are also magnified.

**Wailin Wong** (4:08)
Now, these investments have been legal in the US since 2022 South Korea wanted to keep up, so investors cut money in its stock market.

**Adrian Ma** (4:16)
These ETFs became more popular in Korea as the value of those semiconductor companies grew, making up 20% of trading on the South Korean exchange on some days. Jurrien is not a fan of these tools.