Excessive Use of Margin
There are many tactics involved in investing, and one of the riskiest methods used to increase investment capital and potential returns is to use a margin account.
In some instances, by leveraging the current value of the securities in an account, a financial advisor recommends that a customer should borrow funds from their brokerage firm.
This money can then be used for whatever they want not related to their investments or they can use it to buy more securities, boosting their investing power.
In addition to having to repay this money, investors will also need to pay interest on the loan. Typically, investors must maintain a minimum amount of equity in the account, a number that is usually between 25% to 40% of the current value of the margin loan.
Margin interest is a major profit center for Wall Street, leading many brokerage firms to aggressively recommend the use of margin.
How can borrowing or buying on margin become a problem?
If someone knows what they are doing and has a risk tolerant investment profile, using margin can potentially be beneficial and lucrative. However, it can also be very risky.
If the value of any securities goes down, in order to pay back the loan, the investor may have to put extra money into their account or possibly sell some or all of their investments.
Even worse, if the value plunges far enough, the original investment could be lost. If that happens, they’ll still be on the hook for repaying the margin amount as well as any interest.
Why would a broker recommend this strategy?
When investors go this route, it increases their purchasing power, which may be part of a sound, aggressive investment strategy. However, the associated fees and interest can also be intended to bring in a significant amount of revenue for the firm and broker.
In addition, if the investor decides to use that money to buy additional securities, brokers can earn even more money through commissions. This is why disreputable brokers frequently don’t adequately warn their clients about the potential pitfalls of using margin.
Older investors, in particular, are often taken advantage of in this way. An excessive use of margin usually constitutes unsuitable investment advice for elderly clients, many of whom rely on their investments for income and basic financial security.
Were you unaware of potential unsuitability of margin or did your broker recommend excessive use of it? You need to seek help
If you have suddenly been notified that you have a large margin debt, help may be available. If your broker did not properly explain how using the margin works and what your obligations were, or its use was contrary to your financial situation, you should speak with an elder financial fraud and securities arbitration attorney.
Silver Law Group will provide a free consultation so you can learn about your rights. Call our office at 800-975-4345 or send us a message through our contact us today to speak with one of our experienced securities arbitration attorneys.