• U.S.

Regulation: Trading Stock on the Margin

2 minute read

One of the culprits in the stock market crash of 1929 was margin buying, the practice whereby brokers sold stocks for little or no money down. As a result, Congress in 1934 set up regulations that forced investors to put up more cash. The Federal Reserve got the authority to establish the minimum amount, which at times has been 100% but is currently 50%. A $1,000 stock purchase must now be backed by $500 in cash from the buyer.

Federal Reserve Chairman Paul Volcker contended last week in a cover letter accompanying a 189-page report that such federal regulations are no longer needed. If they exist at all, he wrote, they should be set by the securities industry. Buying stocks on credit, his study concluded, “has become much less important . . . than it was in the early 1930s.” In 1928 nearly 10% of all stocks were bought on margin; last year only 1.4% were bought that way.

Congress, however, will still have to pass legislation to abolish federal margin rules, and Colorado Democrat Timothy Wirth, whose House subcommittee would be the first group to pass on the Federal Reserve’s recommendations, is somewhat cool to the proposal. Says he: “I don’t think we want to do anything to make the market more volatile.”

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