How investing is getting riskier (Two Indicators)

The rise of margin trading

0:00This is Planet Money from NPR.

0:06Hey, Ricky. Hey, Waylon. Tell me, what could you do if you wanted to invest $100 in Apple stock, but you only had $50? Oh, I know the answer. You are talking about margin trading, right? Absolutely. I could set up a margin account with my brokerage firm, put my $50 in there, and then they could lend me the other $50. Of course, at a very high interest rate, and then I could buy that stock. Let's rip some day trades. Absolutely right.

0:36Investors in the U.S. stock market are making a lot of these margin trades these days. The total amount of borrowing is at an all-time record level over $1.5 trillion. That's up by 50% from a year ago. Woof, that is a lot of leverage. Hello and welcome to Planet Money. I'm Waylon Wong. And I'm Ricky Mulvey. Anyway, investing behavior is changing a lot. On one hand, it's easier than ever to participate in the stock market. That means more people can share in wealth creation.

1:08Great. In theory. On the other hand, we see more people taking more risks. So, today on the show, when margin trading goes wrong, a debt-fueled stock market crash in South Korea gives us a cautionary tale, and can sports betting be an investment? This is a growing view of gambling. We have the data on how that works out. The amount of margin debt at U.S. brokerages is now greater than the total amount of American credit card debt.

1:45More money is being borrowed to play with the stock market than we've racked up on our Amexes. And making profits with other people's money is great. The problem is when markets go down. You still have to cover that loan and the interest. If the price of the stock goes down too much, you have two choices. That's Heather Tookes, a finance professor at Yale. You can either sell the stock to start to pay down that loan or post more margin to your account. That is, infuse more capital into your margin account.

2:16In other words, Heather says, put up more cash or be forced to sell investments to cover the loan. In the U.S., investors can use margin trading for pretty much any stock. But it's different in India. So, Heather and her co-author decided to take a look at how margin trades play out there. In India, the regulators were, in some ways, kind to academics in that they designed rules that made studying this question a lot easier. Easier because there's a dividing line in India between stocks that can be bought with margin and others that can't.

2:48She says that made it a great place for a natural experiment on whether margin trades cause market instability. And what they found was, yes, margin mattered, especially during a financial crisis. It's during those downswings that we get this amplification. The margin basket of stocks went down significantly more than the basket of non-margin stocks during the crisis. Many margin sellers were forced to sell their investments to cover loans. This forced selling helped amplify overall losses.

South Korea chip boom fallout

3:18A similar phenomenon just happened in the South Korean stock market. Right. Investors there are excited about two companies, SK Hynix and Samsung. They make memory chips for AI data centers. And, you know, as we've covered on the show, lots of demand for these chips right now. SK Hynix and Samsung dominate South Korea's stock market. The value of both companies skyrocketed as more investors got excited about their chips. This thing is so big and it's moving so fast. That's Yurian Timmer, director of Global Macro at Fidelity Investments.

3:50Semiconductor earnings have tripled in the last year. Like, it's crazy. Everything is sort of in fast forward and is just multiple dimensions more of what we might typically see in a boom-bust cycle. Earlier this year, South Korea legalized single-stock leveraged ETFs. These look just like a normal ETF on the outside, except there's extra leverage, futures and various other financial tricks on the inside to multiply your returns. What could possibly go wrong? Yeah, there's a downside, is that if the ETF loses value, the losses are also magnified.

4:25Now, these investments have been legal in the U.S. since 2022. South Korea wanted to keep up, so investors cut money in its stock market. These ETFs became more popular in Korea as the value of those semiconductor companies grew, making up 20% of trading on the South Korean exchange on some days. Yurian is not a fan of these tools. I call them weapons of self-destruction. I don't know why regulators approve these things. His pessimistic view seems to hold, in Korea at least. The value of its stock market plummeted 40% at one point.

4:58The companies still estimate booming demand for their memory chips, but investors got a little less excited. The leverage bet started to unwind, and margin traders had to sell their investments. More than 3% of the South Korean adult population received a margin call. Their broker saying, hey, you need to sell something or put up more cash to cover these loans. The sell-offs seem to have little to do with the future prospects of these companies. SK Hynek saw revenue more than triple over the past year, and it has plenty of demand for its chips.

5:29You look at the fundamentals of these companies, they're fabulous. So it's just a matter of you're in over your skis, and when you use leverage, you can lose all your capital. Yurian is essentially saying that many South Korean investors took on too much risk, which completely blew up their accounts. Goldman Sachs estimated that about 360,000 brokerage accounts were forced to sell all of their investments to cover their debts. The majority of these accounts belong to people under the age of 35, according to Citibank. Younger people felt confident taking on a lot of risk and maybe had less experience in financial markets.

6:04That's who got hurt.

Federal Reserve margin rules

6:06Now, is there a lesson for the United States? As we've discussed, we're seeing a record level of margin debt here. But here's the interesting thing. While there was limited interest in leveraged ETFs initially, in the last couple of years, it's spiked. And the Federal Reserve can do something about this, at least when it comes to margin debt. The bank has a little-known job. The bank essentially tells investors, how much money do you need in your pocket to borrow a dollar? Right. So if we go back to that example we started with, if you have $50 to invest in Apple and you want to invest $100 total, the Fed could say, OK, we should be more cautious.

6:44Your brokerage firm can loan you, say, $25, not $50. The Federal Reserve played around with this requirement in the years after the Great Depression. Interestingly, that crash came after soaring margin debt fueled a bubble. Should the Fed get involved today? This is more complicated. Yes, margin debt is at a historic level. But Urien says it's not growing as fast as it has in the past. Of course, 2000 comes to mind. That was, of course, the Internet bubble. And the rate of change of margin debt then was 81 percent.

7:16Today, it's about 40 percent. So considerably faster. Urien believes we are in a yellow zone, not a point of panic. That's why I'm saying that you've got to look, you know, not just at the sentiment, but something has to crack in the fundamental story. The Fed hasn't touched these investing loan requirements since 1974. Still, we wondered if now was a good time to revisit this requirement and break out a tool it hasn't used in decades. This would slow down the amount of new debt in the stock market. We reached out to the Fed's press office, but could not get anyone to speak to us on the record.

7:51Urien Timmer believes the Fed may not want to get involved with margin trades for a simple reason. I think the Fed generally does not get into the stock market slash bubble business. They figure nobody can predict these things. Remember, Greenspan especially called an Aztec a bubble in 96 and it ran for four more years. So I think they're at least are humble enough to to know they they can't time these things. Spotting a bubble forming is easy. Timing the pop is much more difficult.

8:22You don't want to shut down a party that could keep rocking for a while. Waylon, I feel really confident about the outcome of a UFC fight this weekend. Oh, no. However, I only have $20 in my pocket. So I was wondering, can Polymarket lend you this money? I'm not lending it to you. Can Waylon, how much money do you have in your wallet right now? The bank of Waylon. I don't carry cash. I'll have you know.

8:48After the break, some new research on just how many young people think of sports betting as investing and how one state government is starting to put up guardrails.

Sports betting as investing

9:05The line between investing and gambling is blurry now. With me for this next story, my co-host at The Indicator, Adrian Ma. Yeah, get this. In the past year, more than half of Gen Z say they've taken dollars intended for investing and put it towards sports gambling. And you can understand why sports betting seems like easy money, when many sports betting commercials advertise hundreds of dollars in free bets just for making a small deposit. All customers get a profit boost every NBA playoff game. New customers spend $5 and get $300 in bonus bets if you win.

9:37New customers turn $5 into $200 instantly in bonus bets. The federal ban on sports betting was struck down eight years ago. And we're just now learning the effects on younger people. For some people, sports betting is more than entertainment. They're trying to make real money with it. In a recent survey, about a quarter of Gen Z said they view sports betting as a high-risk investment strategy or a way to accelerate some kind of goal. Gen Z is anyone aged around 18 to 29. I think, you know, number one, it's not good. That's Dan Egan, vice president of behavioral science and investing at Betterment.

10:11They studied the relationship different generations have with investing and gambling. And we got some of the numbers you heard from their recent poll. I have friends who like, I don't know, collecting cars. But they're honest about the fact that that car, they're not making money on it. It's a hobby. They enjoy it. They enjoy looking at the car. I think the dangerous aspect is when we start confusing our hobbies for investing. Dan says one reason why so many members of Gen Z are using investing dollars for gambling is overconfidence. Like, I watch a ton of basketball. I can spot a winner. And also, some people in younger generations feel this economy just isn't working for them.

10:45So I think that's one of the drivers is the idea that in order to get ahead, just like doing my job, saving regularly, and focusing on my career isn't going to be enough. I have to have some big financial wins. But this isn't true across the board. Are you Gen Z? Yes. Sam Mascara is a 27-year-old incoming PhD student at the University of Michigan. And to be clear, he is three years younger than me. So we are not talking about an alien population here, Adrian. Sam used to bet on basketball, and he saw the ads promising hundreds of dollars in free

11:18bets for just a small deposit. And one of Sam's co-workers said, hey, if you sign up for a sports betting account, then I get a reward too. So he was like, if you join, there's this promotion going on. And I figured it was like five bucks. The NBA preseason was just starting. So I figured it'd be something to try. Why does this feel like an after-school special in the making? Sam says he'd use just about any platform that had a bonus. Bet MGM, FanDuel, even the old ESPN platform. And he says that he never bet more money than he was willing to lose.

11:52But worries about people even younger than him. Gen Alpha. He taught high schoolers. I was seeing economically disadvantaged students. Like they would tell me like, this is an easy bet. Or like, this is like an easy way to make money. He says that some students would find an adult to sign them up for a sports betting account and start playing. These are 16-year-old kids. They did not have the self-control to say, I'll only use the promotion money. I'd hear kids talking to me like, they're putting up like $200 of their money on a random

12:23like basketball game. And to be clear, we're just talking about the sports books here, like FanDuel and DraftKings. Not prediction markets. That's a slightly different beast. Yeah, and we've reported on how prediction markets like Polymarket and Kalshi can advertise to vulnerable people. You can find a link to that in the show notes. State governments are starting to react to the negative effects of sports betting, like addiction. Colorado just passed a new law that introduced new rules for sports betting companies. For example, no more depositing money with a credit card.

12:55If you want to gamble, you can't take out debt. Matt Ball is a Democratic state senator in Colorado. He co-sponsored the bill with a Republican colleague, Byron Pelton. Matt says he's not banning sports gambling. In fact, he's gambled himself. I've bet on sports before. I've been the commissioner of a fantasy league for about 15 years. But he sees issues with Gen Z and gambling, specifically young men. A couple of constituents came to talk with him about it. And that led to a lot more conversations with, you know, everyone from mothers who had sons

13:25come home from college having put, you know, $15,000 on the credit card in one night to national experts in problem gambling. Matt is worried about sports betting as a public health issue. Yeah, and problem gambling is associated with more bankruptcies, loan defaults, domestic violence, and suicides. So, Matt and Byron's big idea? Add some friction. Limit the ways that sportsbooks can reach their customers. Colorado became the first state, where sports betting is allowed, to ban sportsbooks from

13:56sending customers push notifications on their phones and text messages. Reminders like, hey, looks like a game is on. Wanna bet? Another part of their law is limiting the number of deposits that a customer can make in a single day. That number is now six. And at first, I thought this sounded kind of nuts. Customers can always move to another sportsbook, find ways around it. But Matt explained why he wanted to limit the number of times gamblers could add money to their accounts in just one day. When you have a problem, you might set a budget.

14:27I've got $100. I'm going to bet it. This weekend, you blow through that. Hey, I got to make it back. You deposit $200, right? You lose that. You deposit $400. You just keep chasing your losses. One thing that we want to measure is, how effective is that? And Matt says, ultimately, this bill is a test. Would a deposit limit even make a difference? I'd be the first to admit, we don't have any data. So in some sense, like, we're kind of guessing here. You rarely hear lawmakers just say, we're kind of guessing with the law, Adrian.

14:57I mean, I guess it speaks to just how novel this situation is. They're kind of taking the spaghetti at the wall approach to bill writing. Matt and Byron's bill is a rare bipartisan agreement to find some solutions for a real problem. We had everyone from, you know, organizations that care about mental health and care about kids to, you know, groups on the religious right who have a fundamental objection to gambling, who were some of the same groups that opposed the legalization of gambling back in 2019. Colorado signed the bill into law this summer, and Matt says legislators in other states

15:31are starting to reach out to him. At least 10 other states don't allow bettors to make deposits with a credit card, like Colorado, a number that's growing. Dan Egan from Betterment, the behavioral finance guy, he says there may be another optimistic angle. I feel like every generation lives in a new context that was different than the previous one's context when they were that age. And it is entirely possible what we're seeing is just a new coming-of-age story about how people engage with this stuff. As generations grow older, they may realize that sports betting is not easy money.

16:02Or any kind of investment strategy. Dan pointed a research on day trading in the stock market, which you could argue is adjacent to gambling. Like, traders are trying to make money from quick swings in the market. The research found that most day traders generally quit after losing money for a couple of years. Maybe it's an expensive education, but hopefully they will learn. Losing money consistently can get old. And some people in younger generations already understand the game without losing money. Like Sam, our former Gen Z sports gambler.

16:34He says he took the promotion money, bet on some games, and then cashed out. I never bet any of my own money, though. That felt like a good trap that I didn't want to get into. I won probably over like $1,000. Not anything like crazy, but it's still like, it was fun. Since when is $1,000 not a lot of money? I feel like I could have some fun with a grand. Oh, Ricky, don't fall into the trap. Take the bonus and run. A great way to get more planet money or give planet money to a friend who needs it is our book.

17:07It has a whole chapter on how to think about investing. It is Planet Money, a guide to the economic forces that shape your life. Thanks to everyone who rated it and reviewed it. Please keep that up. And if you don't already subscribe to Planet Money's daily podcast, The Indicator, that's where today's episodes first appeared. One slice of the economy explained every day in 10 minutes or less. Follow The Indicator and Planet Money. Today's episodes of The Indicator from Planet Money were produced by Corey Bridges and Cooper Katz McKim. Engineering by Travis Hagen and Sina Lafredo.

17:38It was fact-checked by Sierra Juarez. Julia Ritchie edited our story on gambling. Kate Cannon edits The Indicator. This episode of Planet Money was produced by Jane Sneed. Alex Goldmark is our executive producer. My co-hosts were the wonderful Weyland Wong and the amazing Adrian Ma. I'm Ricky Mulvey. This is NPR. Thanks for listening.

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