Chart of the Week: Margin Debt – The Grand Old Duke Of York
Posted by: Brian Dennehy
Margin debt is money which is borrowed to invest in the stock market.
It is the extra fuel which marches the stock market to over-valued peaks, and its withdrawal is what ignites the sharpest falls off the other side of that peak.
In this chart you can see you can see how the red lines (margin debt) increase with the market. You can also see how this plummets along with the market back in 2000 and 2008.
If you borrow to invest your gains are exaggerated. For example, if I invest £1,000 and the market goes up 10% I gain £100. If I also borrow £1,000, and invest £2,000, a 10% gain means I make £200.
I only invested £1,000 of my own, but made a gain of 20% off a market move of 10%. The magic of margin debt.
But the reverse also applies. Therefore, indebted investors will try and sell early to limit the impact of exaggerated losses. This in turn exaggerates the losses in the market, as they rush to sell.
Such a rush has not happened yet. Look out below when it does.
Chart of the Week