Skip to main content

The big May selloff in stocks forced some investors to unload some of the shares they had bought with borrowed money.

The latest statistics on margin debt reveal that the dollar value of stocks bought with borrowed money declined by $11 billion in May from the prior month. Total margin debt in brokerage accounts totaled $230 billion at the end of May, according to the

New York Stock Exchange


The May decline in margin debt is the first time in three months that the dollar value of stocks bought with borrowed money has fallen below the prior month's level. The May decline is the biggest one-month drop since September 2001, when total margin debt balances fell by $17 billion to $144 billion in the aftermath of the Sept. 11, 2001, terror attacks.

A rapid market selloff can lead to a sharp drop in margin debt, as brokers liquidate customer positions in order to pay down the outstanding loan. Large levels of margin in customers' brokerage accounts can exacerbate a selloff.

Recently, some have attributed the market correction to brokers forcing customers to close out margin positions and selling shares that were bought with borrowed money.

Bears on Wall Street sometimes see a rapid rise in margin debt as sign of an impending market decline. That's because increased margin debt is an indication that traders and investors are willing to take on more risk.

Just before the


market bubble began to burst in 2000, margin debt peaked at $279 billion in March of that year. In the wake of the bubble bursting, the terror attacks and the spate of corporate scandals, margin debt tumbled. The amount of stocks bought with borrowed money bottomed out in September 2002, when margin debt hit $130 billion.

But ever since the fall of 2002, margin debt has been steadily on the increase. Most people trace the end of the bear market to late 2002 and early 2003.

Brokers on Wall Street like to see their customers buy stock on margin, because they earn money off the interest. For instance, interest on margin accounts is a big revenue generator for online brokerages such as


(AMTD) - Get AMTD IDEA Group American Depositary Shares each representing one Class A Report

Scroll to Continue

TheStreet Recommends


E*Trade Financial

(ET) - Get Energy Transfer LP Report


Charles Schwab

(SCHW) - Get Charles Schwab Corporation (The) Report


Big Wall Street firms such as

Bear Stearns

( BSC),

Goldman Sachs

(GS) - Get Goldman Sachs Group Inc. (The) Report


Merrill Lynch

( MER) also like to see rising margin balances, because it means customers are trading more.