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Tracing the Economic Impacts of the Pandemic: A Rise in Margin Investing
As the world buckles in and adjusts itself to the newest wave of COVID-19, global economies appear to be looking to do just the same. In fact, central banks across the globe are now pivoting away from economy-stimulating monetary policies implemented at the start of the pandemic and toward tighter policies with higher interest rates. [1]
At the heart of the decision to pivot in this manner has been a focus on steadily rising inflation, which some policymakers fear the pandemic’s longevity will only amplify. [1] This fear stems from the fact that in large part, populations are learning to coexist with the virus.
As time passes and each new wave appears, is studied, and spreads toward dominance, people become generally better equipped to deal with the pandemic’s impacts – economic and otherwise. Whether because of rising vaccination rates or better overall caution and awareness, many now agree that the largest current threat to the economy is inflation rather than COVID-19. [1]
This is, of course, not to say that COVID-19 doesn’t continue to significantly impact the global economy, as it has since it was first discovered about two years ago. When news of the most recent Omicron strain was released near Thanksgiving, stocks and energy prices took a significant dive, with the Dow Jones Industrial Average falling 2.5% for its steepest one-day percentage downturn in over a year. [2] In the several weeks following Omicron’s emergence, however, the stock market has largely rebounded.
Given the many remaining questions surrounding Omicron, including existing vaccines’ ability to effectively protect against the strain, as well as the severity of infection, further economic impacts may certainly come to fruition. As details continue to fill in, however, it is a fitting time to carefully consider some of the myriad market impacts already ushered in by the COVID-19 pandemic.
One of these market impacts has been the meteoric rise in retail investing, fueled by app-based securities trading platforms like Robinhood and Stash, aimed for use by the average main street investor. These platforms empower retail investors to participate in the stock market by facilitating trades on fractions of shares, all from the convenience of a smart phone. The use of these apps also facilitated the “meme stock” frenzy, wherein retail investors gathered over social media and stoked intense interest in stocks like GameStop and AMC – sending their share prices flying.
While these app-based platforms have empowered more investors than ever to enter the market, they’ve also posed potential financial pitfalls along the way. One such pitfall involves margin investing, wherein investors may supercharge their potential gains in the market by investing not only their own money, but also money they’ve borrowed. While the rewards of margin investing may be great, the risks are potentially even greater. [3]
Specifically, investor’s trading with margin are subjected to a minimum balance in their accounts. If their balance falls below this minimum – as can very well happen during a sudden market downturn or sell-off like the one effectuated by the news of Omicron in late November – the investor may be subjected to a margin call. When a margin call is issued, the investor is required to deposit additional money into their account in order to meet their required minimum balance.
Furthermore, many equate excessive levels of margin investing with “euphoric” behavior in the market – which can often be a sign of a serious impending market downturn. [3] As of now, the market does not appear to have reached dangerous levels of such market euphoria. [3] But as inflation continues to rise and COVID-19 continues to impact our lives in new ways, investors should exercise caution, as always, when making decisions about margin investing.
Sources:
[1] https://www.wsj.com/articles/central-banks-worry-omicron-could-sustain-inflation-11639909805
[3] https://www.wsj.com/articles/black-friday-rout-shows-dangers-of-margin-borrowing-11638100800