Retail Investors Join Record Margin Borrowing Binge as Robinhood's Margin Book Hits $21.6 Billion

Luu lives with his mother, Kim Nguyen, a 66-year-old retiree, in a three-bedroom, two-bathroom house in Houston. In May 2021, while researching how to obtain more capital to invest in Tesla, he discovered margin investing: borrowing from a broker to buy stocks while using existing investments as collateral. Borrowing gave him more buying power and could be repaid as the stock appreciated. The main risk was a margin call, or having to deposit more money if the account's value fell. He asked his mother, a former accountant who was still awake that evening, for her opinion. She found it interesting. Soon after, he began using margin to invest in Tesla for the first time.

About a year later, Luu had amassed more than $100,000 in margin debt. “I went really crazy,” he told CNBC. “The stock was going up, and so I was like, 'There's no way I could lose.'” After five years of margin investing, including a period in 2022 when he worried that further Tesla declines could trigger a margin call, he is working to pay down his largest margin balance ever. In June, he exercised $165,000 on five Tesla call options and bought 500 shares at $330 per share. After accounting for cash in his account, that drove his borrowing to more than $156,000. Tesla swung from below $370 a share to more than $430 during that month.

Between his Tesla investments, company stock and 401(k), and subtracting his margin debt and other debt such as car and student loans, Luu's net worth has risen to more than $800,000 from negative territory seven years ago. “I'm very close to becoming a millionaire,” he said. He also stressed, “What I'm doing is risky. I don't recommend anyone do it.”

Luu is part of a growing trend. Robinhood's margin book reached $21.6 billion in the second quarter, up 127% year over year and 332% from $5 billion in the second quarter of 2024. Eligible users must have a portfolio value of at least $2,000 to margin invest on the platform. Devin Ryan, head of financial technology research at Citizens, said Robinhood has made a concerted effort to attract customers who actively use margin because they are the most active traders. Brokerages can collect interest on margin loans, while highly active customers can generate additional trading-related revenue. Ryan pointed to transfer bonuses, low margin rates and high cash yields in Robinhood's offers over the past couple of years. He also said easier access through smartphones has fueled margin investing. Other parts of Robinhood's business are growing too, including retirement assets, which have nearly quadrupled in the last two years.

A Robinhood spokesperson told CNBC that its products are designed to appeal to a number of customers. The spokesperson said “we don't believe it's accurate to characterize” its transfer promotions as specifically targeting “active traders who are trading on margin or may trade on margin.” The company said it tries to “meet users where they are” and “reject any implication” that it is “encouraging risky trading.”

Robinhood's margin debt is not the only measure at a record. Total margin debt hit an all-time high of around $1.5 trillion in June, according to the Financial Industry Regulatory Authority, whose data includes institutional investors such as hedge funds and retail investors. Not all of that debt is driven by fresh borrowing. For example, as equities rise in value, an investor may need to cover a short position that has been marked to market, or valued at its current price. Sam Huszczo, chief investment officer at SGH Wealth Management, said the market's bull run, which has seen multiple record highs this year alone, is feeding a shift in investor psychology. Margin debt is one sign. “That's greed,” Huszczo said, adding that it is “not everywhere” in the market but is “certainly creeping into pockets.” He also said, “Margin, that's only the tip of the iceberg of what we can see.”

Editor's Summary

Retail margin borrowing has reached record levels, with Robinhood's margin book at $21.6 billion in the second quarter and total margin debt around $1.5 trillion in June, according to FINRA. Hy Luu's Tesla trades show how individual investors can accumulate large gains and large debts, while he acknowledges the risk. Robinhood disputes that its promotions target active margin traders or encourage risky trading.