Black Friday Volatility Illustrates Downfalls of Record Margin Borrowing
From the Desk of Jim Eccleston at Eccleston Law:
The Black Friday rout, which hammered stocks and energy prices in the U.S. and across the world, may lead to a broader pullback if more bad news pertaining to the new variant of Covid-19 emerges, according to industry experts.
Nevertheless, the Black Friday volatility illustrates the fragility of the economy’s rebound from March 2020. Industry experts note that individual investors have more regularly begun to utilize margin debt, which enables investors to borrow against portfolios of stocks and bonds. However, experts are concerned that an overreliance on debt-fueled buying may lead to volatile trading periods similar to Black Friday.
According to the Financial Industry Regulatory Authority (FINRA), margin borrowings in October 2021 increased by 42% to $935.9 billion compared to one year earlier. While margin borrowing has become increasingly popular since March 2020, borrowing on margin tends to become more prevalent when stock prices rise, according to industry experts. The Federal Research recently released its Financial Stability Report, which discussed the concerns pertaining to the use of margin borrowing by younger investors. The report added that younger investors are employing much higher leverage ratios, which leaves them prone to margin calls and other issues when prices fall.
Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, regulatory and disciplinary matters.
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