[Emergency Review] The Terror of Stock Market Crashes and Margin Trading — Learning from the Kioxia Plunge: Understanding 'Margin Calls' and the Importance of Cash-Based …
The current stock market is shrouded in a very heavy atmosphere, compounded by the sharp decline in the Nikkei Stock Average and overseas markets, as well as the crash of semiconductor-related stocks (such as Kioxia) that had previously been driving the market.
On social media and online investment forums, there is an overflow of voices from investors who are screaming as their funds are wiped out due to relentless sell-offs—even on good earnings reports—and the occurrence of massive ‘margin calls’ (additional collateral) in margin trading.
While there are sayings like ‘a crisis is an opportunity’ and ‘a crash is a buying opportunity,’ why are so many people suffering such significant losses in this current downturn?
In this article, we will organize the current state of the market, while explaining the structural dangers of margin trading and the basic principles of cash-based investing for individual investors to survive in an easy-to-understand manner.
1. What is happening in the market right now? (Organizing the current situation)
In this current bear market, the stocks that suffered the most damage were those with high levels of ‘margin buying balances’.
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Deteriorating market sentiment where even good earnings don’t lead to buying: Even though corporate performance itself is not bad, investor sentiment across the entire market has cooled rapidly due to external factors such as macroeconomic uncertainty, currency fluctuations, and geopolitical risks.
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Chain reaction of forced liquidations in margin trading: Highly popular semiconductor stocks, including Kioxia, had attracted margin buying aimed at ‘further gains’ using leverage (borrowed money). However, once the stock price broke through key support levels, unrealized losses expanded all at once. Collateral value plummeted, and the positions of investors who could not replenish cash by the deadline were forcibly dumped by securities firms.
The ‘negative spiral’ where selling triggers further selling is a major factor in this crash.
2. What is a ‘margin call’ in margin trading? Why does it become a debt (loan)?
Some investment beginners might think, ‘If I lose money on stocks, doesn’t it just mean the money I used to buy them disappears?’ However, that only applies to ‘cash transactions’.
The fundamental difference between cash transactions and margin trading
Margin trading is a mechanism that allows you to trade up to approximately 3.3 times your initial deposit. However, if the stock price crashes contrary to your expectations, the value of the assets used as collateral drops, and if it falls below the standards set by the securities firm, a ‘margin call’ (additional collateral) occurs.
If you cannot pay the margin call, all your held positions will be forcibly liquidated (cut loss) in the market. At that time, any remaining deficit after settlement becomes a ‘legal outstanding debt (loan) to the securities firm’ that must be paid. If left unpaid, late payment interest will accrue, and it will eventually lead to the seizure of your salary and assets.
3. Is ‘a crash an opportunity’ true? How to face a falling market
In the market, there are two schools of thought: the proverb ‘don’t catch a falling knife’ and the idea that ‘a crisis is an opportunity (buying the dip).’ It is important to understand the difference.
① Cases that can be called an opportunity (Cash-based, long-term diversified investment)
If you are using NISA or similar accounts to purchase index funds like the S&P 500 or All Country World Index (eMAXIS Slim) using dollar-cost averaging (monthly fixed-amount accumulation), a crash becomes a ‘bargain sale where you can buy more units for the same amount of money.’ As long as you are buying with cash, unrealized losses during a crash are merely ‘valuation losses’ and will never become a legal debt. The strength of cash-based investing is the ability to wait for the market to recover over time.
② Dangerous cases (Margin trading, concentrated investment)
It is extremely high-risk to attempt a ‘bottom-fishing’ trade using margin trading to aim for a quick turnaround just because prices have dropped, or to jump into individual stocks that still have a massive amount of margin buying outstanding. This is because until the selling pressure is physically exhausted (supply and demand improve), no one can predict where the bottom will be.
4. Summary: The Golden Rules for Surviving in Investing
In a market crash, the most important thing is not to ‘make a killing,’ but to ‘avoid being forced out of the market.’
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Avoid leverage (margin trading): If you stick to ‘cash-based trading’ using only surplus funds, you will not face the risk of incurring debts that keep you up at night, no matter how volatile the market becomes.
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Diversify time and assets: Do not bet everything on the assumption that ‘this is the lowest price’; instead, spread out your purchase timing.
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Avoid panic selling: If you are holding sound assets in long-term investment accounts like NISA, historical data shows that the most effective strategy is to stick to your original plan and continue accumulating, rather than panicking and selling off due to fear of short-term unrealized losses.
Market waves will always come in cycles. Properly fearing the risks of margin trading while maintaining a ‘cash-based, long-term’ approach that aligns with your personal risk tolerance is, in the end, the surest path to success.