The Effect of Investment Literacy on the Likelihood of Retail Investor Margin Trading and Having a Margin Call

Abstract

Using a sample of 1,215 US retail investors, we provide evidence on the effect of investment literacy and of investment literacy overconfidence on the likelihood of purchasing securities on margin, and also, among those who had purchased securities on margin, the likelihood of experiencing a margin call. Based on multivariate analyses, the likelihood of buying on margin decreased with investment literacy, and also increased with overconfidence. The likelihood of buying on margin decreased with age, and increased with risk tolerance and with the amount of investment assets. Among those who had bought securities on margin, the likelihood of experiencing a margin call decreased with investment literacy, without control variables, and increased with risk tolerance. However, with control variables, no variable had a significant relationship with having a margin call. This study provides important insights for researchers as well as practitioners on the relationship between margin trading and market quality.

Keywords: Margin trading, margin call, investment literacy, overconfidence, risk tolerance

JEL Classification: D14, D81, D91, G11, G41