According to the Securities Industry and Financial Markets Association (SIFMA) “Dashboard” publication for the week ending August 21, the 52-week range for the Dow was low. This break in the market, as well as the disappearing gains over the last year, drive the question: will investors suffer unnecessary losses due to excessive margin, overconcentration or other stockbroker negligence.
This remains to be seen. However, the practice of buying on margin—in short, borrowing money from a broker to purchase stock—could have a direct impact on brokers and brokerage firms. Many of these investors were encouraged to trade or sell speculative or low-priced securities through margin accounts. We have already received several calls from investors who were encouraged by cold callers to open accounts only to suffer losses.
Here’s a bit of background on margin accounts and margin calls:
Trading on margin is different than trading on cash. When you trade on margin, you open a margin account in which you are allowed to borrow up to 50% of the purchase price of a stock from your broker or brokerage firm. This type of account is frequently used for short-term investments when you risk borrowing money to increase your potential return.
When you sell the stock, you first repay your broker (plus interest) until the loan is fully paid before you realize returns. Additionally, you are bound by a restriction called a “maintenance margin,” in which your broker determines the minimum account balance you must maintain. Should your account total risk falling below your maintenance margin, your broker can require you to either deposit more funds, or the broker has the right to sell the stock—even without consulting you—to pay down your loan in what is called a “margin call.”
According to a recent article on the Securities Arbitration Commentator website, margin debt has risen about 17% to $548 billion, which is purportedly the highest posting of margin debt to be found in FINRA records.
For investors who invested in margin accounts at the advice of their broker or financial adviser, margin calls can result in substantial financial loss. However, margin interest is a huge profit center for Wall Street. Brokers and brokerage firms are continuously reminded by regulators to “avoid margin deficits through adequate liquidation procedures and warn customers of the consequences of insufficient margin or overmargining” according to the SAC article.
According to the article, the anticipated result is that investors will likely to pursue claims for suitability, misrepresentations or fraud if this market break continues and financial losses continue to occur due to unsuitable advice to use margin or invest in speculative securities. Investors have also complained that their accounts have been liquidated at unreasonable prices or were the subject of auto-liquidation programs which caused unnecessary losses.
If you have suffered financial loss due to a margin call recommended by your broker, you may be able to recoup your losses through securities arbitration. Contact Silver Law Group today for a free consultation where we’ll discuss your rights and review your case. All work is done on a contingent fee basis, which means you won’t pay legal fees unless we win your case.