FINRA has issued an investor alert concerning investments purchased “on margin.” A “margin” account allows an investor to borrow money from a brokerage account to purchase additional securities. This loan to purchase additional securities is not free as the investor must repay the amount borrowed with interest. Margin loans can be “highly” profitable for brokerage firms and brokers. FINRA’s investor alert details special risks associated with trading on margin:
If the equity in your account falls below the maintenance margin requirements under the law—or the firm’s higher “house” requirements—your firm can sell the securities in your accounts to cover the margin deficiency. You will also be responsible for any short fall in the accounts after such a sale.
Some investors mistakenly believe that a firm must contact them first for a margin call to be valid. This is not the case. Most firms will attempt to notify their customers of margin calls, but they are not required to do so. Even if you’re contacted and provided with a specific date to meet a margin call, your firm may decide to sell some or all of your securities before that date without any further notice to you. For example, your firm may take this action because the market value of your securities has continued to decline in value.
There is no provision in the margin rules that gives you the right to control liquidation decisions. Your firm may decide to sell any of the securities that are collateral for your margin loan to protect its interests.
These changes in firm policy often take effect immediately and may cause a house call. If you don’t satisfy this call, your firm may liquidate or sell securities in your accounts.
While an extension of time to meet a margin call may be available to you under certain conditions, you do not have a right to the extension.
A decline in the value of the securities you purchased on margin may require you to provide additional money to your firm to avoid the forced sale of those securities or other securities in your accounts.
See FINRA’s investor alert here.