Margin trading is one of the primary sources of profit for brokerage houses. For the average individual investor, there are few faster ways to lose nearly all of your assets than through large-scale participation in margin trading.
If you have lost a significant amount of money because your broker was trading on margin, please contact a securities arbitration lawyer at McCarthy, Lebit, Crystal & Liffman in Cleveland, Ohio. We work to help victims of stockbroker misconduct get their money back.
Trading on margin means the brokerage house loans you money you can use to purchase securities. You can borrow up to 50% of the value of the stock or other assets in your brokerage account, and those assets in turn serve as collateral to secure the loan. In comparison to buying stocks using only your own money, margin borrowing provides leverage and can dramatically increase your profits if the stocks you buy go up. But margin also dramatically increases your risks if the stocks you buy go down.
The Margin Call
If the value of collateral in your account falls below the “maintenance margin,” a minimum value established by your brokerage firm, the firm will issue a margin call requiring you to immediately deposit additional cash or securities to boost the account value back up above the maintenance margin. Often, a customer has no option but to liquidate securities in order to obtain necessary cash to meet the call. Even worse, your brokerage firm can sell your securities and may not even be required to consult you before doing so. Under most margin agreements, a firm can sell your securities without waiting for you to meet the margin call and you have no right to control which stocks will be sold. Add interest charges and commissions, and a customer can be looking at large losses, and even total losses.
Customers who do not understand margin and have no business using it are sometimes persuaded by stockbrokers to open margin accounts. Many of these customers assume that margin works like a conventional loan. They expect to eventually pay back what they borrow, but they don’t understand the workings of maintenance margin or margin calls and are unaware that, unlike the default on a mortgage loan, their liability can be sudden, immediate, and beyond their ability to control.
If your broker was trading on margin with your funds without your knowledge or authorization or if he or she failed to explain the significant risks of margin trading, please contact a stock broker misconduct attorney at McCarthy, Lebit, Crystal & Liffman for experienced representation in securities arbitration.