Borrowing money to invest! What could go wrong?

The total amount of money Americans have borrowed to invest in the stock market has hit an all-time record: over $1.5 trillion. That's 50% higher than a year ago, and it now exceeds the total amount of American credit card debt. More money is being borrowed to play the stock market than people have racked up on their Amexes. This is margin trading—borrowing from a brokerage to buy stocks—and it's booming. But when these bets go wrong, the unwinding can be brutal, as a recent crash in South Korea made painfully clear.

How margin trading works

Margin trading is straightforward: you put up some of your own money, your brokerage lends you the rest, and you buy more stock than you could otherwise afford. If the stock goes up, you keep the amplified gains. If it goes down, you face a choice. As Yale finance professor Heather Tookes explains, "You can either sell the stock to start to pay down that loan or post more margin to your account"—meaning put up more cash. This forced selling is the mechanism that can turn a normal downturn into a cascade.