FINRA Cautions Investors on the Risks of Purchasing Securities Using Margin

FINRA recently issued an Investor Alert, “Investing with Borrowed Funds: No ‘Margin’ for Error,” warning investors about risks of trading on margin. When an investor uses margin, he or she is essentially using a loan from the firm to purchase securities. FINRA explained that it was re-issuing the Investor Alert, because investor purchases of securities on margin averaged more than $406 billion for the first nine months of 2013 – a 27 percent increase over the same period last year. FINRA stated that “we are concerned that many investors may underestimate the risks of trading on margin and misunderstand the operation and reason for margin calls. Investors who cannot satisfy margin calls can have large portions of their accounts liquidated under unfavorable market conditions. These liquidations can create substantial losses for investors.”

The Investor Alert urges investors to understand the following risks associated with margin:

The Investor Alert explains “[w]ith a margin account, you can borrow money from your brokerage firm to purchase securities. The portion of the purchase price that you must deposit is called margin and is your initial equity or value in the account. The loan from the firm is secured by the securities you purchase. If the securities you’re using as collateral go down in price, your firm can issue a margin call, which is a demand that you repay all or part of the loan with cash, a deposit of securities from outside your account, or by selling some of the securities in your account.”

In addition, the Investor Alert cautions that “[b]uying on margin amounts to getting a loan from your firm. When you buy on margin, you must repay both the amount you borrowed and interest, even if you lose money on your investment. Some brokerage firms automatically open margin accounts for investors. Make sure that you understand what type of account you are opening. If you don’t want to trade on margin, choose a cash account for your transactions.”

The Investor Alert also encourages investors to “Do Your Margin Homework” and consider the following:

Sonn Law Group specializes in representing investors (not brokerage firms) in securities arbitration and investor fraud cases throughout the country. Sonn Law Group has represented numerous investors in FINRA arbitration claims against the brokerage firms who sold illiquid, high-commissioned, non-traded investments, including TICs, REITS, promissory notes, and more, as well as investors who have been encouraged to use margin or other borrowed money to purchase securities. To learn more, including whether you may have a claim for investments related to the use of margin or other investment losses, please call us at 844-689-5754 or complete our “contact form.”