"Charge It!" (on Margin)

Amidst the Nasdaq's 42% run year to date, signs of speculative greed are emerging. One is the soaring share prices of unprofitable, nearly sales-less companies like Research Frontiers (Nasdaq: REFR  ) and Intelli-Check (AMEX: IDN  ) . Another is the soaring use of margin, or borrowing money to buy stocks.

Total margin lending, as reported by the New York Stock Exchange (NYSE) and National Association of Securities Dealers (NASD), is still 42% below its peak at the top of the bubble in March 2000. Even so, margin use is rising rapidly, as evident in the following from today's edition of USA Today:

  • As of July (the latest available data), NASD-regulated firms had borrowed $26 billion on margin, topping the old record from March 2000.
  • Margin use by NASD-regulated firms is up 412% this year and 32% in July.
  • Total margin buying, including that of NYSE and NASD firms, reached $174.4 billion in July, up 25% this year and the highest level in two years.

Perhaps some solace can be found in the fact that these figures are making the news in USA Today. If America's everyman newspaper is worried about margin use, then a case could be made for these fears already being discounted into stock prices.

Either way you interpret the data, Fools would do well to remember what Warren Buffett has said about buying stocks on margin (to roughly paraphrase): If you're smart, you don't have to; if you're not, you'll get into trouble.


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