Margin Accounts

You have my apologies if this is remedial. And I suspect to many in the industry, it might be. But I am a firm believer that to effectively communicate anything, you have to start by establishing a solid foundation to build from. Today’s musings revolve around Margin accounts. For those of you not familiar with the tool, they’re a form of borrowing that uses your existing account as collateral. Similar to how a home equity line of credit is credit backed by your home; margin is credit backed by your existing investment accounts. They all vary to some degree, be it borrowing requirements, or rates of interest, but the majority of them are pretty straightforward. The amount you can borrow, is determined by the amount you have.

For the sake of simplicity, let’s assume you have $10,000 in your bank account. You saved it, it’s real money, now you’re wondering what to do with it. You can buy $10k worth of securities (Apple or Microsoft or whatever), then that 10k will fluctuate based on the price of what you bought it at. As an example, today MSFT is trading at $517.81. So with $10,000 you can buy about 19 shares (19 x 517.81 =9,838.39), pretty straight forward so far. But what if you LOVE Microsoft, and you think it’s going to appreciate quickly. You’re all in, but you don’t have enough for even one more share ($10,000 - $9,838.39 = $161.61 < $517.81) so you’re tapped out, right? Wrong, you can use that same account to secure more money. Initial borrowing requirements are usually something in the neighborhood of 50%. So you can call any trading platform and say “hey I’d like to open a margin account” and poof, you now have another 20k in your account. It’s not yours, it’s a loan, but it looks and spends like cash. So now you have the ability to buy another 20k in MSFT which would give you a total of 57 shares ($20,000/$517.81 = 38.624 or 38 whole shares, plus the original 19 shares = 57).

So now you have $10,000 real dollars and you have a paper position of 57 shares in Microsoft which as of now equals $29,515.17  (57 * 517.81 =29,515.17). What could go wrong? Well, assuming the price appreciates, nothing. If markets continue to grow there’s no issue. When MSFT hits say 800 dollars a share, You now have the same $10,000 real money, but a whopping $45,600 (57 * 800 =45,600) in unrealized gains, what I’m referring to as “paper money”. If things move in that direction you’re unstoppable. You’ll continue to compound indefinitely. You just made $16,085 (45,600 - 29,515 =16,085). MSFT is up 54.5% (800 - 517.81 =282.19 & 282.19 / 517.81 =0.545) but your 10k investment is now worth $26,085. Keep in mind, if you sell and close out the position you’d likely want to return the 20k you borrowed, but that means if you sell today, you could sell that position and walk away with a whopping 260% (26,085 / 10000 =2.609) off a stock that appreciated 54.5%. What could go wrong?

The flip side of that coin is the issue. If say MSFT goes to $400, you now have the same 10k but only $22,800  (57 shares * $400= $22,800). Even though you only have 10k skin in the game, you lost 7000 dollars! In this hypothetical, MSFT lost 22.8% (517.81 - 400 =117.81 & 117.81 / 517.81 =0.228) but your account is now worth $2,800 ($22,800- your borrowed 20k) meaning you lost 7,200 in real money from your original 10k or a -72% (7200/10000=0.72) return.

What’s worse is that you are now likely below your margin requirement, and you would likely need to meet a “maintenance margin.” Maintenance margin is a number that you always have to stay above. Usually, it’s something below initial margin requirements, for the sake of this example let’s ballpark 25%, as it’s the most common. So, you need 10k to borrow 20k, giving you 30k to invest in totality initially, but if your account were to dip to 22,800 in the hypothetical above you now have $2,800 in real money and the same $20,000 in borrowed money. Meaning you’re below your margin requirement (22,800 - 20,000 =2,800 & 2,800/22,800=0.123 so 12.3% < 25%). This is going to trigger a lot of bad stuff, likely someone will reach out and tell you that you have to deposit more money to get your account above the “maintenance level”, or they’ll forcefully sell your shares for you to meet it themselves. You start to see why Mark Twain quipped “a banker lends you their umbrella when the sun is shining but wants it back the second it starts to rain.”

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Ok, thanks for all the math, but what’s the point? The point is that major market dislocations typically happen when borrowing disappears. In 2008 the market to borrow money for houses evaporated when owners of houses could no longer make their monthly payments. They couldn’t do this because many of their rates floated significantly higher than they had ever planned for, pushing their monthly payment amounts above what they should have qualified for, but let’s table the specifics for the sake of this parallel. If people don’t want to buy your loan, banks don’t want to issue it. You (and everyone else) can’t get loans, house prices go down. Because house prices don’t care if you bought houses on credit or with cash, it all appreciates their prices the same. When that credit you used to drive up prices disappears, prices adjust downward. Similarly, the Great Depression was caused by these exact margin accounts hitting support levels forcing people to liquidate their positions. MSFT likely appreciated when you (and everyone like you) used 20k of borrowed money to buy it. It’s not real money for you, but the appreciation in the price of the stock is very real, the reverse is unfortunately also true.

As of September 2025 margin levels in retail trading accounts are in the neighborhood of $1.13 trillion, according to FINRA. That’s a staggeringly large number. To put that in perspective, if you were to buy every company in the S&P 500 at the same time (assuming prices didn’t move) it would be about 60 trillion dollars. What’s even more perplexing is that the vast majority of 2025’s stock market gains are in a very small group of names dubbed “the magnificent 7” or Apple, Microsoft, google, Amazon, Nvidia, Facebook, and Tesla. Added together those stocks alone account for about 21 trillion (#1 in footnotes).

You probably have two questions. First, if the total S&P index comprised of 500 companies is $60 trillion, how is it that just 7 of those 500 companies account for over a 3rd of that number? And second, what happens if that $1.1 trillion in margin gets taken away, or “called” as in the example above? To be perfectly honest, no one knows. The federal reserve is an exponentially different player than ever. And global markets, crypto currencies, and the AI booms have all created very unique market valuations. It becomes clear that investing “Art” isn’t always investing “science”.

We can use history to help us find at least a little perspective. In 1929 the total market cap of the S&P was something like $300 billion total. Admittedly we need to do some ballpark estimates here, because of how markets have evolved over the last 100 years. It was basically the S&P 90 back then (the actual S&P 500 wasn’t launched until 1957). But of that $300 billion, there were estimated to be around $9 billion in margin accounts. As for concentration, the top 7 companies then accounted for only about $18 billion (#2 in footnotes). Back of the envelope math is pretty interesting in itself. In 1929 the market was worth $300 billion, and margin (paper money) accounted for about 9 billion of that. So of the $300 billion about 3% was “credit” (9/300=0.03).

From a crude comparison we look ok, so far. Margin was 3% of the total benchmark in 1929, and only 1.8% (1.1/60=0.0183) today. Sweet, plenty of room to run, even if we adjust for rounding and my watered down math. But I think the story here is the combination of credit, AND the dramatic difference in concentration. Back then the top 7 companies only accounted for about 18 billion of the 300 billion total. That means the top 7 companies accounted for  6% (18/300=0.06) of the broader benchmark. Today the top 7 companies account for 35% (21 trillion / 60 trillion).

In his new book “1929” Andrew Ross Sorkin does a remarkable job humanizing the crash. He tells stories of characters from president Hoover to J.P. Morgan, even some comedians of the time like Charlie Chaplin and Groucho Marx. After losing a tremendous amount of money in US Steel (market cap at the time - $4 billion) Mr. Marx is quoted as telling his advisor “my biggest mistake was in trusting you.” What I found somewhat chilling was when he discussed RCA. At that time it had a market cap of around $1.5 billion, an extreme valuation that the author describes advisors justifying to clients as being worth the valuations because of a tremendous new technology (radio) that they were bringing to the market.

I’ll let you decide how correlated Nvidia’s AI, and RCA’s radio are, to their respective broader economies. That’s a whole different essay in and of itself. My main argument is that if the top 7 of 90 companies accounting for 6% of the total market where able to dislocate margin accounts totaling 3% of the market, what can 7 of 500 companies accounting for 35% of the broader market do to margin accounts totaling 1.8% of the market?

The answer is of course that no one knows. Markets are much larger now, the federal reserve is much more involved, even margin limits themselves are significantly different than they were then. My concern is in the fragility associated with that level of concentration. If the market was 60 trillion spread evenly across 500 companies, each company would only account for $120 billion (60/500=0.12). In that hypothetical, assume Apple gets hacked, has some unfavorable tariff change their business, or even something we can’t imagine like their headquarters gets hit by a meteor, we’d be down a very survivable 120 billion in a 60 trillion dollar market. Today however if the same black swan event happened it would send a 4 trillion dollar shockwave across markets forcing margin accounts to come up with cash they don’t have. And when they can’t product it, their securities would be forcibly sold and further exacerbated the drawdown.

Again, for the sake of this post, I don’t claim to know what specific risks are lurking around the moats of these companies. Instead I just want to point out how fragile this type of leverage makes an economy. And more importantly I want to call your attention to how this particular credit instrument can (and has) topple even the strongest of markets. Especially when risk is concentrated largely across 7 companies instead of the perceived 500. Please invest accordingly.

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#1. As of early November 2025, the market capitalizations of the Magnificent Seven stocks are approximately as follows:

1. **Apple Inc. (AAPL)**: $4.0 trillion
2. **Microsoft Corporation (MSFT)**: $3.85 trillion
3. **Alphabet Inc. (GOOGL)**: $3.3 trillion
4. **Amazon.com Inc. (AMZN)**: $2.62 trillion
5. **NVIDIA Corporation (NVDA)**: $4.53 trillion
6. **Meta Platforms, Inc. (META)**: Approximately $1.63 trillion
7. **Tesla, Inc. (TSLA)**: Approximately $1.46 trillion

#2. Top Companies and Their Estimated Market Caps in 1929

1. **U.S. Steel Corporation**: Approximately **$4 billion**
2. **General Electric**: Approximately **$3.5 billion**
3. **Standard Oil of New Jersey**: Approximately **$3 billion**
4. **AT&T (American Telephone and Telegraph)**: Approximately **$2.5 billion**
5. **General Motors**: Approximately **$2 billion**
6. **Chrysler Corporation**: Approximately **$1.5 billion**
7. **Railroad companies (such as Pennsylvania Railroad)**: Approximately **$1.5 billion**