First it was subprime, then it was the home equity crisis. Today it is margin loans. In a day when the Australian Stock Market slumped 7.3%, making it the biggest fall in 28 years, debt was again playing its role.
With double digit returns as long as you could remember, it was hard to play in the stock market and not make money. The sheer ease of making money in the markets helped people make the decision to take out margin lending loans. These loans typically provided the investor a portfolio up to 2/3 larger than their equity. As stock continued to climb, these investors made the margin between the interest and the money to make on the stock. But as shares fall . . .
Geoff Wilson, from Wilson Asset Management, has told ABC Radio’s PM program, those investors that have used borrowed money to buy shares are having to sell, because their stocks’ values have fallen past a certain point.
“A lot of retail investors are being forced to sell out. Last Thursday was a record margin call day for investment banks around town,” he said.
“Then yesterday was another record, which was three times bigger than the previous Thursday, and I’m sure today will be another record margin call day.”
» Forced selling partly behind market fall: analyst – The ABC, 22nd January 2008