Margin trading involves borrowing money from the brokerage firm to purchase securities greater in value than the equity/value in an investor’s account. Using margin to purchase additional securities can increase the potential returns of the investment, as well as increase the amount of potential losses in the investment. For this reason, margin trading may not be suitable for many investors, especially those without other assets to cover potentially large losses.
If you believe you may have lost money as a result of the unsuitable use of margin or unsuitable borrowing of funds to buy securities, you should contact one of our lawyers as soon as possible.
When an investment account uses margin to buy securities, the securities account is considered collateral for the margin loan. Should the value of the securities account decline, the customer may be faced with a margin call where the firm requires the customer to deposit more cash or securities into the account to increase the equity. The securities firm can also sell securities within the margined account to reduce the margin debit balance.
Stockbrokers and financial advisors often have a financial incentive to use margin because it allows them to sell more securities and generate higher commissions. Alternatively, if the customer is paying a percentage fee to the advisor, the use of margin can increase the value of the account and thus increase the fees.
A broker’s recommendation to use lines of credit secured by an investment account may create similar risks, and those risks must be determined to be suitable for the customer and in their best interest before such a recommendation should be made. FINRA, formerly known as NASD, has also put brokerage firms on notice in Notice to Member 04-89 that recommendations by advisors to tap into or liquify customers’ home equity to buy securities or investments may not be suitable for all customers. Brokerage firm supervisory systems should also address the related risks of liquifying home equity to purchase securities.
Due to the risky nature of trading using margin, disputes with brokers often arise when there are significant losses. If a broker trades on the margin without the knowledge or consent of the investor, or recommends the use of margin despite it being unsuitably risky for the investor customer, the investor may be able to recover the losses resulting from the fraud.
The attorneys at Greco & Greco have filed many FINRA arbitrations over the past 25 years involving the unsuitable and high-risk recommendation and use of margin by customers’ stock brokers and financial advisors, often resulting in significant losses for the customer. Many cases involve situations where the customer was not aware that margin was being used to purchase securities, or situations where the customer did not understand what margin was, and the risks associated with margin.
If you believe that your broker / financial advisor or brokerage firm has unsuitably recommended or used margin in your securities / investment account, please contact Scott Greco for a free attorney consultation. Our Virginia securities fraud lawyers represent individuals from all states across the country and have decades of experience protecting the rights of customers, and holding securities firms responsible for the acts of their brokers.