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Volatility Taking Its Toll as Margin Debt Declines 6.9% in Oct.

Markets: Downturn indicates that short-term trading is falling out of favor with investors.

November 15, 2000|From Bloomberg News

The recent volatility in U.S. stock markets is taking its toll on investors who prefer to buy stocks on margin--meaning they use borrowed funds.

The amount borrowed from New York Stock Exchange member firms to buy stocks fell 6.9% to $233.3 billion in October, down from September's $250.7 billion, the Big Board said.

October's margin debt equaled 1.32% of the market value of U.S. public companies, according to research firm TrimTabs.com, down from 1.37% at the end of September and 1.54% at the end of March.

The March figure was the highest since the current rules on margin borrowing were introduced in 1974, TrimTabs said.

Margin debt was $250.7 billion in September, the NYSE said.

Although the amount borrowed fell in October, margin debt is still up 28.1%, or $51.2 billion, from the end of October 1999, according to TrimTabs. That's when margin debt started surging.

Still, the decline in margin debt in October indicates that so-called momentum investing, or buying stocks and selling them quickly to take advantage of short-term rallies, has decreased. That's a positive for the stock market, said TrimTabs President Charles Biderman.

"The speculative excess hasn't been totally reversed, but most of it has," said Biderman. "In the meantime, income growth remains strong, and you have companies whose stock price is cheap still doing well."

Borrowing to buy shares helped fuel a rally in January and February and then contributed to a slide in stock prices. As stocks fell, brokerages required investors who had borrowed money to buy shares to come up with more cash as the value of their collateral declined.

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