By Telis Demos

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Margin borrowing may not be a great predictor of the S&P 500's next move. But it can still tell us something useful about how to invest.

Borrowing that happens in brokerage accounts, often used to buy more stocks, is at an all-time high as of July, and topped $1 trillion for the first time ever as of June, according to tracking by Finra, which collects data from brokerages.

The tempting inference is that more borrowing by investors means they are getting overly bullish. And that any correction will be magnified as investors are forced to roll back their borrowing. (Some especially quick rises in margin debt have preceded corrections.)

But there is a lesser-known driver of the growing size of margin debt: the rise of the market itself.

Investors who have borrowed shares to short-sell them need to post collateral to their lenders. As share prices rise, they need to post more. That cash can be automatically drawn from a margin loan.

So when stock prices rise, margin debt can become mechanically bigger. When that is the case, margin is no more useful than the S&P 500 point total in predicting the next move.

Perhaps if margin borrowing by individual retail investors was surging faster than the overall total, it might be a signal of exuberance among that crowd. But Finra doesn't track who is doing the margin borrowing, or for what purpose they are using it.

However, there is one thing the rising level of margin debt does tell us: It is a great time to be in the brokerage business.

Margin-loan books grew well over 15% at both Charles Schwab and . Interactive Brokers Group in the second quarter from a year earlier, for example. On top of fees generated by trading volume, this helps fuel growth in net interest income, even with interest rates falling from a year ago . Robinhood Markets' margin book grew 90% in the second quarter from a year earlier, as the firm unveiled new pricing last year to attract more sophisticated individual traders.

Even if it isn't a "market top" signal, though, margin levels still matter to some stocks. Shares of brokerages and Wall Street trading firms have been essentially supercharged bets on the rising market. Robinhood is up more than 400% over the past year. Interactive Brokers is up over 100%, and Schwab is up around 45 . Morgan Stanley and Goldman Sachs are up about 40%. The S&P 500 is up 13%.

But this can be a double-edged sword. If prices plunge, so can margin lending. Investors roll back borrowing to slash risk. And as collateral needs shrink, rather than grow, margin debits can become credits, and interest income falls. So, too, can fees that are based on the value of assets or portfolios. This means revenues can drop on the downswing just as they rose on the upswing. And brokers' shares may fall faster on the downside, too.

So while margin debt won't tell you when the market will go down, it may tell you who could one day pay a stiff price.

Write to Telis Demos at Telis.Demos@wsj.com

(END) Dow Jones Newswires

August 25, 2025 07:30 ET (11:30 GMT)

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