Buying Stocks on Margin

Buying Stocks on Margin

Leverage and the Japanese stock market bubble

Leverage and the crash of 1929

Can it happen again in the US?

Leverage and the Japanese stock market bubble

Japanese investors indirectly used leverage in the bull market of the late 1980s

Borrowed against the inflated value of their land

Both land and stock market crashed in early 1990s

Japanese stock market lost about 60 percent of its value from 1990 to 1993

Japanese commercial real estate lost about 60 percent of its value from 1991 to 1996

Leverage and the crash of 1929

Able to borrow up to 90 percent of the price of a stock in 1929

Prices fell rapidly as people were forced to sell to meet margin calls

Can it happen again in the US?

Likelihood is much lower

Now can only borrow a maximum of 50 percent of the price of a stock

Higher margin allowed against more stable securities

• Can borrow up to 70 percent of the price of corporate bonds
• Can borrow up to 90 percent of the price of government bonds

But people have grown too accustomed to good returns in the stock market

"Why should I pay cash for a truck? I'll just borrow at 8 percent and keep my money invested in the stock market where it will get 15 percent..."

Sounds like the savings and loan "can't lose" investment strategy

"We'll borrow from depositors short-term at 5 percent and lend out long-term at 8 percent..."

Both of these strategies work on average over the long run

The problem is you can go bankrupt in the short run