How investing is getting riskier (Two Indicators)

SPEAKER_1 (0:01)

This is Planet Money, from NPR.

Waylon Wong (0:06)

Hey, Ricky.

Ricky Mulvey (0:07)

Hey, Waylon. Tell me, what could you do if you wanted to invest a hundred bucks in Apple stock, but you only had $50?

Waylon Wong (0:15)

Oh, I know the answer. You are talking about margin trading, right?

Ricky Mulvey (0:20)

Absolutely.

Waylon 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.

Ricky Mulvey (0:33)

Let's rip some day trades.

SPEAKER_4 (0:34)

Absolutely right.

Ricky Mulvey (0:36)

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 percent from a year ago.

Waylon Wong (0:51)

Woof, that is a lot of leverage. Hello and welcome to Planet Money. I'm Wayland Wong.

Ricky Mulvey (0:57)

And I'm Ricky Mulvey. Investing behavior is changing a lot.

On one hand, it's easier than ever to participate in the stock market. That means more people can share in wealth creation. Great. In theory.

On the other hand, we see more people taking more risks. So today on the show, when margin trading goes wrong, a debt-fueled stock market crash in South Korea gives us a cautionary tale, and can sports betting be an investment? This is a growing view of gambling. We have the data on how that works out.

Waylon Wong (1:38)

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.

Ricky Mulvey (1:50)

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 Tuke (1:57)

If the price of the stock goes down too much, you have two choices.

Ricky Mulvey (2:01)

That's Heather Tuke, a finance professor at Yale.

Heather Tuke (2:04)

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.

Waylon Wong (2:16)

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.

Heather and her co-author decided to take a look at how margin trades play out there.

Heather Tuke (2:32)

In India, the regulators were in some ways kinds of academics and that they designed rules that made studying this question a lot easier.

Ricky Mulvey (2:42)

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 Tuke (3:00)

It's during those down swings that we get this amplification.

Waylon Wong (3:05)

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.

Ricky Mulvey (3:18)

A similar phenomenon just happened in the South Korean stock market.

Waylon Wong (3:22)

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.

Ricky Mulvey (3:35)

SK Hynex and Samsung dominate South Korea's stock market. The value of both companies skyrocketed is more investors got excited about their chips.

Urien Timmer (3:43)

This thing is so big and it's moving so fast.

Waylon Wong (3:45)

That's Urien Timmer, Director of Global Macro at Fidelity Investments.

Urien Timmer (3:50)

Semiconductor earnings have tripled in the last year.

It's crazy. Everything is in fast forward and is just multiple dimensions more of what we might typically see in a boom bust cycle.

Waylon Wong (4:01)

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?

Ricky Mulvey (4:18)

Yeah, there's a downside. Is that if the ETF loses value, the losses are also magnified.

Waylon Wong (4:25)

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.