People Are Using Borrowed Money To Buy Stock Like It's 2007 Or 1999

No FX this time, but to important to avoid.

 

Leverage is dangerous for many reasons, but the dangers of an excessively  levered market are really rather simple to understand.  As DB says, it  creates an environment that can lead to a disorderly unwinding of excessive  risk:

“Margin debt can be described as a tool used by stock speculators to borrow  money from brokerages to buy more stock than they could otherwise afford on  their own. These loans are collateralized by stock holdings, so when the market  goes south, investors are either required to inject more cash/assets or become  forced to sell immediately to pay off their loans – sometimes leading to mass  pullouts or crashes.”

Margin debt creates the sort of unstable environment that makes a snowball  effect much more likely than it would be in an environment without margin debt.   If you recall 2008 you likely remember hearing about how many fund  managers were “forced liquidators” of portfolios.  That was, in large part,  due to the excessive leverage.

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(c)Business Insider

 

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