Margin debt, the money that investors borrow from brokerage firms to buy stock, rose 5% in March, the
New York Stock Exchange
Debit balances in margin accounts rose to $278.5 billion from $265.2 billion in February, a $13 billion increase, marking the lowest percentage gain since October.
The numbers show brokerage customers continued to invest more borrowed money in the stock market despite warnings from
chairman, and other economists that margin buying has been a factor in driving stock prices to artificial and unsustainable high valuations.
Economists and strategists watch the numbers closely because stocks bought on margin can lead to a potential second charge that can accelerate falling prices. As stocks bought on margin fall, brokerage firms issue margin calls, forcing investors to either put more money into declining stocks or have their positions sold out. Economists said margin calls appeared to have contributed to the near collapse of the
Margin debt, which rose 62% from 1998 to 1999, increased 45% from October until February alone. After contributing to the Nasdaq's fall, the increase may slow further next month if margin calls have taken their toll, said Joseph A. Lavorgna, senior economist at
Deutsche Bank Securities
In attempting to control wild speculative buying, the Federal Reserve allows investors to borrow no more than 50% of a stock's value from a brokerage house. Congress authorized limits in 1934 because margin buying with as little as 10% cash up front helped run up stocks prior to the 1929 market crash, and the resulting margin calls contributed to the severity of the crash. The Fed had changed the limits 22 times by 1974 before settling on the 50% margin requirement. At one point, it required investors to put up 100% cash when buying stocks.
Some economists said changes to margin limits may have little effect on current markets because eager investors can easily buy stocks with money borrowed in other ways, such as with home equity loans.