NCPA - National Center for Policy Analysis

Borrowing To Purchase Stocks Soars

January 28, 2000

Buying stocks with borrowed money -- usually called "buying on the margin" -- ruined many an investor in the market crash of 1929. Although the federal government has tightened up on the rules since then, officials -- including Alan Greenspan -- are concerned by a big jump in such borrowing last year.

  • Americans borrowed 62 percent more last year than in 1998 to buy stocks.
  • The amount of credit extended by members of the New York Stock Exchange to individual investors jumped by $88 billion to $228.5 billion by the end of the year.
  • Observers report that borrowing seems to be concentrated on day-traders betting on stratospheric gains in stocks of Internet start-up and other technology stocks.
  • The increase in borrowing was particularly pronounced during November and December -- which helped propel the NASDAQ Composite Index to a record 86 percent gain for the year.

While borrowing helps leverage investors money and allows them to realize much greater returns on successful investments, it also exposes them to heavy losses when their stocks decline.

The Federal Reserve is considering tightening the lending rules. But Chairman Greenspan has speculated publicly that doing so would primarily disadvantage small investors who do not have the financial wherewithal that big investors have.

The New York Stock Exchange and the National Association of Securities Dealers have proposed increasing the minimum active day-traders must have in their trading accounts in order to borrow from $2,000 to $25,000.

Source: Partake Hill, "Big Boost in Buying Stocks 'On Margin," Washington Times, January 28, 2000.


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