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Margin debt is the sum investors borrow from brokers using a margin account, offering a leveraged position to potentially magnify returns. This method lets investors capitalize on a stock's upward movement without fully committing capital, thus enhancing potential rewards (or risks).
The latest data from FINRA for September highlighted a consecutive monthly decline in margin debt, settling at $680.85 billion. This represents a decrease of 1.2% from the previous month and an increase of 2.5% from the previous year. However, after inflation adjusting, the numbers dip to 1.5% month-over-month and 1.1% year-over-year.
We should also note that margin debt figures are usually a fortnight old when revealed. For instance, August figures are disclosed around mid-September. Historically, from 1997 to 2000, margin debt mirrored market trends, then rose steeply. After the tech bubble burst, its ascent was more gradual until a steep rise around 2006, reaching its high point in 2007. Peaks in margin debt often precede market highs, as observed in December 2021 which trailed an October margin debt peak. Interestingly, the recent market dip in September into October was on the heels of the margin debt peak in August.
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