Margin Debt Hits Record High

Investors ramped up their borrowing against brokerage accounts in April, taking margin debt to its highest-ever level.

Investors borrowed $384.4 billion against their investments in April, a 1.3% gain from the previous month, and a 29% rise from the same month last year, according to the New York Stock Exchange.

That exceeds the record high of $381.4 billion in debt held against investments, known as margin debt, from June 2007. New York Stock Exchange member brokerage firms report the levels of margin debt held against client accounts monthly.

The rising level of debt is seen as a measure of investor confidence, as investors are more willing to take out debt against investments when shares are rising and they have more value in their portfolios to borrow against. The latest rise has been fueled by low interest rates and a 15% year-to-date stock-market rally.

Some see the increase as a sign of speculation, particularly if the borrowed money is reinvested in stocks.

But advisers say that margin debt can be a cheaper and easier way to borrow than a traditional loan, so they are recommending margin borrowing for uses like home renovation and business expansion.

Sean Sebold, president of Sebold Capital Management in Naperville, Ill., said that his clients aren’t betting on markets with margin debt.

“There are too many other tools that you can use with better leverage characteristics,” Sebold said. “Why leverage up an equity account when you can buy futures [contracts]? It’s not terribly challenging to get leverage.”

Sebold has recommended that a client use margin debt to help finance flipping houses, since the client could borrow money more quickly on margin than he could by taking out a different type of loan
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