Sunday, September 02, 2007

Margin Debt

Last year in May Cramer mentioned that Margin Debt was at a record high and he speculated that was why the market dropped sharply in June 2006. I finally found a source that gives month-by-month margin debt for the NYSE. Back in May 2006 it was (let me see if I can get the zeros right): $230,540,000,000.

Now if you buy on margin and the market drops sharply, you can get a margin call as there are limits of the ratio of margin to your portfolio worth. A margin call can force you to sell stocks while the market is declining (generally not a good thing). So excessive use of margin can exacerbate a stock market correction. I do not use margin.

So what do you think the total margin debt was in July 2007? I wondered myself. Here is the chart for 2007 (I think it pretty much speaks for itself):

End of monthMargin debtFree credit cash accountsCredit balances in margin accounts
January$285,610$90,340$156,190
February$295,870$96,550$155,140
March$293,160$99,690$161,890
April$317,990$104,360$162,570
May$353,030$109,030$176,200
June$378,240$119,300$179,920
July$381,370$122,740$205,830

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