Everyday Investors Increase Margin Borrowing Amid Stock Market Surge

In Houston, 29-year-old engineering consultant Hy Luu found himself exploring ways to increase his investment capital in Tesla shares back in May 2021. While researching, Luu came across margin investing, a strategy where investors borrow money from brokers to purchase securities, using their existing holdings as collateral. This method seemed appealing because it offered more buying power with the potential to repay loans as stock prices rose. However, the risk of a margin call loomed if the value of his portfolio dropped, requiring him to add funds to his account.

Living with his mother, Kim Nguyen, in their three-bedroom Houston home, Luu sought her advice. Nguyen, a retired accountant, was awake late that night and took an interest in the concept. Her reassurance encouraged Luu to start margin investing in Tesla stocks.

Over the next year, Luu aggressively increased his margin debt, eventually exceeding $100,000. "I went really crazy," he admitted, motivated by Tesla's surging stock price. Despite the soaring market, 2022 brought moments of anxiety when he feared a margin call could force him to sell shares amid price drops.

By June, Luu had exercised $165,000 worth of Tesla call options, acquiring 500 shares at $330 apiece. Factoring in his account cash, his margin debt climbed above $156,000. Tesla's share price fluctuated between under $370 and over $430 during that period.

Taking into account his Tesla investments, company stock, 401(k), and subtracting margin and other debts like student and car loans, Luu's net worth has risen dramatically from negative seven years ago to over $800,000 today. "I'm very close to becoming a millionaire," he said, though he cautions others about the risks involved, not recommending this path for everyone.

Luu's experience mirrors a broader trend among retail investors. Platforms like Robinhood have witnessed explosive growth in margin borrowing. In the second quarter of 2024, Robinhood's margin book reached $21.6 billion, a 127% increase from the previous year and a 332% rise since 2021. To access margin trading on Robinhood, users must have portfolios worth at least $2,000.

Devin Ryan, who leads financial technology research at Citizens, notes Robinhood's focus on customers who actively use margin, as they generate significant trading activity and interest revenue. Robinhood has offered incentives such as low margin rates and high cash yields to attract these users.

Robinhood has emphasized that its products cater to a diverse user base and denies intentionally encouraging risky trading. The company aims to meet clients where they are financially without promoting aggressive margin use.

Margin debt is not only rising on Robinhood. According to the Financial Industry Regulatory Authority, total margin debt across the market hit nearly $1.5 trillion in June, including institutional and retail investors. Some of this growth results from rising stock prices increasing the value of existing loans rather than new borrowing alone.

Sam Huszczo, chief investment officer at SGH Wealth Management, sees this surge in margin debt as a reflection of investor sentiment fueled by the market's strong performance this year. While he acknowledges pockets of greed and fear of missing out, he describes the overall market as healthier than some fear. Still, he warns that increasing leverage and risky products like leveraged ETFs add vulnerability.

Huszczo advises investors to avoid overconcentration in single stocks or sectors, a caution echoed by many financial advisors. However, Luu has remained focused on Tesla since his first purchase in late 2019.

His journey began shortly after starting his current job and learning about investing through a coworker who suggested Robinhood. Initially dabbling in index funds and cryptocurrency, Luu found the returns slow and sought faster growth. The turning point came when he chose between buying a Honda Civic or a Tesla Model 3. After a test drive, he reserved the Tesla and took delivery within weeks.

Luu views Tesla not just as a car but as a symbol of the future of electric and autonomous vehicles. His investment strategy reflects his belief in this vision, despite the risks involved. His story illustrates how retail investors are increasingly using margin loans to amplify their stakes in the stock market, contributing to record borrowing levels and shaping market dynamics.