Tags: margin | debt | Hulbert | stocks

Margin-Debt Level Rises to Record High Along With Stocks

Friday, 25 Oct 2013 11:18 AM

By Dan Weil

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As stocks are soaring to record highs, so is the margin debt that some investors use to buy them.

Margin debt borrowed to purchase securities soared to a record $401 billion in September for members of NYSE Euronext, according to the exchange, CNBC reports.

That represents a gain of 4.8 percent from August, the largest monthly increase since January. And the $401 billion figure represents a 5.2 percent premium over the July 2007 peak of $381 billion, three months before the stock market hit record highs.

Editor’s Note:
5 Reasons Stocks Will Collapse . . .

But experts warn that while buying stocks on margin looks tempting when equities are going up, it can be quite costly on the way down.

"Investors love going on margin in a rising market environment, but when the market declines, it can be extremely painful," Paul Hickey, co-founder of Bespoke Investment Group, tells CNBC.

"Don't forget that if you go on margin you also have to pay interest on that loan, and some brokers charge pretty high rates. So you are already starting in the hole."

Wall Street Journal columnist Mark Hulbert notes that 26 years after the astounding October 1987 stock crash, we should remember that meltdowns do occur.

Xavier Gabaix, a New York University finance professor, and fellow researchers predict that the market will have a 20-percent down day once every 100 years, a 15-percent down day once every 50 years and a 10-percent down day once every 13 years, Hulbert says.

"Because crashes are both inevitable and unpredictable, you need to permanently insulate your portfolio against them, unless you have a very long investment horizon and the discipline to stick with your strategies even in the wake of a crash," Hulbert writes.

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

Related Stories:

Jon Markman: Stocks Can Go 5 More Years Without 10 Percent Correction

Hedge Fund Manager Spitznagel: Stocks May Plunge 40 Percent

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