MONEY

Money borrowed to buy stocks hits record

Adam Shell
USA TODAY

Investors continue to bet big on the Wall Street bull, at a time when stocks are hovering near records but have been unable to break through to fresh peaks.

Borrowing money to buy stocks is a sign that investors remain optimistic the market will continue to rise.

The latest data from the New York Stock Exchange show margin debt, or cash borrowed to buy shares, hit a record $528.2 billion in February, up from its prior high of $513.3 billion in January.

Borrowing money to buy stocks is a sign that investors remain optimistic the market will continue to rise. Like any form of leverage, such as a home flipper buying a house with, say, a 30% down payment in hopes of fixing it up and selling it at a higher price, there’s risk in loading up on stock after taking out a loan to fund the purchase.

Falling stock prices and a resulting drop in one’s brokerage account balance, for example, could force investors to have to put up more collateral to meet the lender’s requirement. In some cases, the investor will have to sell stocks that are falling in value to raise the cash.

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Another yellow flag: Prior periods when margin debt hit records occurred around stock market peaks, including 2000 when the dot-com stock boom went bust, and 2007 when stocks began to crater amid early signs of trouble in the housing market ahead of the 2008 financial crisis.

Margin debt jumped 22% from the end of 1999 before peaking in March 2000 at $278.5 billion, the same month stocks peaked. In 2007, margin debt shot up to $381.4 billion in July, three months before stocks topped.