A Household View of Making Purchases on Margin: Focusing on Divergence in Investment Literacy and Advice Seeking Behavior

Abstract

A great deal of research has studied the use of margin from an overall market perspective. However, very little has been observed regarding household decisions around margin use. The 2018 wave of the National Financial Capability Study Investor Survey provides unique insight into household margin use, and these new variables have made studying margin use on a household level possible. This study investigates the relation between both objective and subjective investment literacy, as well as the divergence in investment literacy and margin use. Results indicate that respondents who have a higher level of subjective investment literacy than objective investment literacy (investors who think they know more than they actually do) have a higher probability of buying on margin. This finding appears to be even more pronounced for respondents who receive investment advice from brokers compared to those who do not.