Part 3 of 5
The Quiet Role of Borrowed Money
A market can fall and barely make the history books — or fall and trigger a catastrophe. The difference often comes down to one quiet ingredient that shows up in nearly every crash.
A stock market can fall 20% and barely make the history books. It can also fall 20% and set off a catastrophe. What separates the two?
More often than people realize, the answer is a single, quiet ingredient: borrowed money. In the first two articles of this series, we looked at how 1929 became a depression and why today's market is both expensive and top-heavy. Now we turn to the accelerant — the thing that, time and again, has turned an ordinary decline into a historic one.
How borrowing turns a dip into a slide
When you buy stocks with borrowed money — what's called buying "on margin" — you put down part of the price and your broker lends you the rest. On the way up, this feels wonderful: you control more stock than your own cash could buy, so your gains are magnified.
The catch arrives on the way down. If your stock falls far enough, the lender wants its loan protected, and issues what's called a margin call: add more cash, or we sell. Many people are forced to sell. That selling pushes prices lower — which triggers margin calls for other borrowers — which forces more selling, which pushes prices lower still.
Picture a snowball at the top of a hill. It starts small. But as it rolls, it gathers more snow and more speed, growing into something that flattens whatever is in its path — and it does not stop because you ask it to. Borrowed money is what turns a gentle slope into that snowball. The technical name for it is forced selling, and it is the difference between a market that dips and one that breaks.
If you're curious — the technical side Buying on margin, by the numbers Click to read more →
Say you have $1,000, borrow another $1,000 from your broker, and buy $2,000 of stock. If it rises 25% — to $2,500 — you repay the $1,000 loan and keep $1,500. You turned $1,000 into $1,500: a 50% gain on your money, double the stock's actual move. That's the appeal.
Now run it backward. If the stock falls 25% — to $1,500 — your $1,000 stake is suddenly worth $500: a 50% loss from a 25% drop. Fall far enough, and the broker won't wait — they'll sell to recover the loan, whether you like it or not. Leverage doubles the ride in both directions, and only one of those directions lets you choose when to get off.
1929: the snowball with no brakes
In the 1920s, the borrowing was extreme. Investors could buy stocks by putting down as little as 10% of the price and borrowing the other 90%. That worked beautifully while prices rose — and became a trap the moment they didn't. A drop of just 10% could erase everything a buyer had put in and trigger a forced sale.
So when prices broke in October 1929, the margin calls cascaded. Forced selling fed on itself, prices spiraled down, and there were no brakes built into the system to slow it. The borrowing didn't start the decline — but it turned what might have been a painful correction into a generational collapse.
Where things stand today
Two things have changed for the better, and one is worth watching.
First, the rules. After 1929, regulators set firm limits on borrowing to buy stocks. Today you generally must put down at least half the price yourself — not 10% — so the reckless extremes of the 1920s simply aren't allowed anymore.
Second, the watch-item: borrowing to invest hasn't gone away. The total amount investors have borrowed to buy stocks recently passed $1 trillion for the first time, and has since climbed to record highs. But here's the honest, non-alarmist read — and it matters: a big number is not automatically a warning. Much of the rise is mechanical, since borrowing tends to grow simply because the market has grown. Record borrowing isn't a crystal ball. What it does tell you is that there's more fuel in the system than there was a few years ago — and fuel matters when a fire starts, even if it can't tell you whether or when one will.
If you're curious — the technical side Why "record" borrowing isn't a flashing red light Click to read more →
It's tempting to read "record margin debt" as a countdown to disaster. The reality is more nuanced. Much of the rise is mechanical: as stock prices climb, the dollar value of what people have borrowed against them climbs too — so margin debt tends to set records simply because the market keeps setting records.
Measured against the total size of the market, today's borrowing — while large — isn't as extreme as the raw figure suggests, and it has actually grown more slowly than stock prices in recent years. That's why professionals treat margin debt as a gauge of mood and risk appetite, not a reliable predictor of crashes. It tells you how much fuel is in the room. It can't tell you whether anyone will light a match.
What this means for you
The lesson of borrowed money isn't that leverage is evil. It's that leverage quietly removes your choices at the worst possible moment. An investor who owns their holdings outright can simply wait out a storm and let prices recover. An investor who borrowed may be forced to sell at the bottom — locking in losses at the exact moment patience would have paid off.
That's why understanding how much borrowed money sits beneath an investment — your own, or the market's as a whole — is part of staying steady. The goal isn't to predict the next snowball. It's to make sure you're never the one being pushed downhill by it. And it's a worthwhile thing to check with whoever helps manage your money: how much of what you own is truly yours, and how much is borrowed?
Where this fits in the series
Each Friday builds on the last. Here's the road we're traveling together:
Next Friday may be the most important article in this series for anyone near or in retirement: why "safe" depends on the weather — and why a rising market doesn't guarantee the income you'll one day rely on.
Two things before you go
Jot down any questions this raised. Bring them to your next quarterly review — including the simple, useful one: how much borrowed money, if any, sits inside my own plan? We're always glad to walk through it with you.
Know someone who'd find this useful? Send it their way. Helping the people you care about feel calm and informed about their money is a gift — and we're glad to be the ones who wrote it.
Disclosure. SG Wealth Managers is an investment adviser registered with the Arizona Corporation Commission, Securities Division. This article is provided for educational purposes only and reflects general information believed accurate as of the date of publication. It is not investment, legal, or tax advice, and it is not a recommendation or solicitation to buy, sell, or hold any security or to adopt any investment strategy. Investing involves risk, including the possible loss of principal; past performance does not guarantee future results, and historical examples are simplified for illustration. Any opinions are subject to change without notice. Before acting on anything you read here, please consult a qualified professional about your individual circumstances.