Margin Debt Down for 4th Straight Month

The bear market continues to make many investors leery of buying stocks with borrowed money.

Margin debt--the amount borrowed from brokerages to finance stock purchases--fell in September for the fourth straight month, the NYSE said Friday.

Margin debt fell 10% to $144.7 billion from the end of August to the end of September, compared with monthly declines of less than 3% in the previous three months.

“The big [market] sell-off in September has washed out margin debt,” said Donald Coxe, chief strategist at Harris Investment Management.

Trading on margin allows a buyer to put down a percentage of the purchase price and use the stock being bought as collateral. If the stock price plunges, however, a margin investor must either deposit more cash into the account or sell the stock to cover the loan.

Investors can typically borrow up to 50% of the value of their stock holdings to finance the purchase of other stocks or use the funds for other expenditures.

Margin debt has decreased by about half from its record level of $278.5 billion reached in March 2000, when technology and Internet stocks peaked. The total has come down every month since August 2000 except for April and May of this year, when the market began to rebound after diving in the first quarter.

A rise in margin debt signals investors expect stock prices to rise.

The total value of all U.S. stocks fell 9.5% to $13.14 trillion at the end of September from $14.52 trillion at August’s end. That left margin debt equaling 1.1% of the market value of all U.S. public firms, about the same level in percentage terms as in the 1991 recession, said Charles Biderman, chief executive of Santa Rosa, Calif.-based investment research firm TrimTabs.com.