Borrowing From the Market: The Risks of Margin Accounts

by Wall Street Fraud on November 13, 2012

Secutities fraud attorney philadelphiaWhen investors want to purchase securities, they can either pay for them in full or borrow part of the purchase price from their brokerage firm by opening a margin account. Because margin interest rates are currently at historic lows, many investors are opting to take advantage. In fact, margin loans at brokerage firms reached the highest level in nearly four years during the past two quarters of 2012.

Although margin accounts can be a great way to boost the value of your investment account, it is important to understand that there are risks. As highlighted in a recent Wall Street Journal article, “When you use margin, you merely appear to be borrowing from yourself. Instead, you are borrowing from one of the most unstable and unreliable lenders imaginable: Mr. Market, that personification of investors everywhere, sometimes euphoric, sometimes miserable, never predictable.”

In a recent Investor Alert, FINRA also detailed a number of additional risks, including:

  • You can lose more funds than you deposit in the margin account. A decline in the value of securities that are purchased on margin may require you to provide additional funds to the firm that has made the loan to avoid the forced sale of those securities or other securities in your account.
  • The firm can force the sale of securities in your account. If the equity in your account falls below the maintenance margin requirements under the law—or the firm’s higher "house" requirements—the firm can sell the securities in your account to cover the margin deficiency. You will also be responsible for any short fall in the account after such a sale.
  • The firm can sell your securities without contacting you. Some investors mistakenly believe that a firm must contact them for a margin call to be valid, and that the firm cannot liquidate securities in their accounts to meet the call unless the firm has contacted them first. This is not the case. As a matter of good customer relations, most firms will attempt to notify their customers of margin calls, but they are not required to do so.
  • You are not entitled to an extension of time on a margin call. While an extension of time to meet initial margin requirements may be available to customers under certain conditions, a customer does not have a right to the extension. In addition, a customer does not have a right to an extension of time to meet a maintenance margin call.

With this in mind, investors should carefully consider the risks and the benefits before opening a margin account.

If you have been the victim of broker fraud, we may be able to help you recover your losses. Contact us today at 215-839-3953 for a free consultation.

At Wall Street Fraud, we are dedicated to offering assistance to those who have been hurt by improper corporate or investment practices.

If you have been the victim of stock brokerage fraud, securities fraud, mutual fund fraud, stockbroker fraud, annuities fraud, or any other type of investment fraud or negligence, please contact our securities fraud attorneys today for a free case evaluation. Our talented and aggressive legal and professional staff is eager to help you recover your losses.

 

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