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While You Were Watching Consumer Debt

posted by Buce

Look what happened to investor margin debt (from the WSJ--link):

Hungry Investors Boost Margin Debt
By GASTON F. CERON

A rising stock market encouraged investors to go into debt to trade stocks, leading to an increase in the level of so-called margin debt in 2006.

Such debt is accumulated by investors who trade "on margin" with funds borrowed from their brokers. As tracked by the New York Stock Exchange, margin debt rose to $270.52 billion in November from $221.66 billion at the end of 2005, the first time in more than six years that margin debt has topped $270 billion. December numbers will be available later this month.

That 22% increase left margin debt not far from the record of $278.53 billion, reached in March 2000 as the Nasdaq Composite Index was setting a record high. Last year's rise in margin debt occurred against a bullish backdrop for stocks, with widely followed market indexes notching double-digit percentage gains.

Market analysts track margin-debt activity as an indication of investors' appetite for speculative trading.

A potential pitfall for those trading on margin is a sharp decline in stock prices, which can expose investors to margin calls, requiring them to post additional collateral or see their brokers sell their securities. Some market watchers consider high levels of margin debt worrisome because a wave of margin calls triggered by a sharp market decline could exacerbate the selling pressure on stocks.

Hat tip: Daniel Gross.

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