NASD warns as margin debt soars

By Jonathan Stempel

NEW YORK (Reuters) - As thousands of homeowners are realizing it's unwise to borrow more than they can afford, the NASD is offering a similar warning to investors: It's risky to invest more than you have.

The brokerage regulator said on Tuesday that the amount of debt that investors took on to buy securities, known as buying "on margin," had soared to a record $321.2 billion in February.

That topped the previous record of $299.9 billion in March 2000, at the peak of the last bull market in stocks. Margin debt has more than doubled from $141.3 billion in January 2003, the NASD said, three months after the bottom of a bear market in stocks.

With a margin account, investors can borrow money from a brokerage to buy securities. Investors must pay back what they borrow, plus interest, even if their investments lose value.

"Too many investors are unaware they could suffer substantial financial losses," NASD Chairman Mary Schapiro said in a statement.

Margin investing is risky because investors can lose more money than they invest. Brokerages can also force the sale of securities to meet a "margin call," causing tax consequences.

"When the Internet bubble imploded, many people were shocked to learn that firms can sell their stock, and they have no choice in what can be sold," John Gannon, an NASD senior vice president for investor education, said in an interview. "Some firms default you into a margin account, and we've heard from investors who weren't even sure they were in one."

Regulators, including the Federal Reserve, the New York Stock Exchange and the NASD, set minimum requirements for margin traders. Brokerages are free to set more stringent standards.