Short Selling on the Rise; Margin Credit Falls 2.8%

More signs that the bearish tone on Wall Street is deepening:

* Short interest--the volume of shares borrowed and sold, usually in anticipation of lower prices--rose 2.2% to a record 5.91 billion shares on the New York Stock Exchange as of Aug. 15 from a month earlier, the New York Stock Exchange said Tuesday.

* Total margin credit outstanding from NYSE-member brokerages dipped in July to the lowest level since March 1999, the Big Board also reported. Margin credit represents money borrowed against brokerage-account assets, often to buy more stock.

A rising short-interest total often means more investors are betting that share prices will slide, though short sales also are used in hedging transactions as well as in pure speculative bets.

In a short sale an investor borrows stock from a brokerage and sells it at current market prices, pocketing the proceeds. If the stock’s price then slides, the investor can buy back the shares for less and repay the loaned stock. The profit on the trade is the difference between the sale price and the buy-back price.

If a stock’s market price rises after an investor shorts it, however, the investor can face potentially limitless losses until the trade is closed out.

August marks the sixth consecutive month that short-interest totals on the NYSE have reached new highs.

The 2.8% decline in NYSE-member margin credit in July--to a total of $165.25 billion from $170 billion in June--suggests fewer investors were willing to gamble by borrowing to buy shares.

Margin credit reached an all-time peak of $278.5 billion in March 2000 as the stock market overall was hitting its peak.