Why does margin trading magnify the swings of my portfolio? That is a question
we hear a lot from individuals who contact our law firm to determine if
they have a valid claim against their brokerage firm to recover losses.
When buying securities on margin, an investor borrows part of the funds
needed to purchase the securities from his or her brokerage firm.
Just like a bank lends you money to purchase a home with a mortgage loan,
a brokerage firm lends you money to invest against the value of securities
in your portfolio. The securities in your margin account act as collateral
for the loan. Margin trading has the effect of magnifying any profit or
loss made on the investments.
While buying on margin carries a potential for greater reward because you
are increasing your buying power, it also carries increased risk, including
the potential to lose more money than was initially invested.
Just like any loan, when you buy securities on margin, you have to pay
back the money you borrowed plus interest. So if the value of the securities
in your portfolio decline, you haven’t just lost the amount of the
decline, you must also pay back the borrowed money. The brokerage firm
can force the sale of any securities in your margin account if the value
falls below their margin requirements, even if it may result in completely
wiping out your account and still leaving you with a loan to pay back.
As you can see, purchasing securities on margin can result in substantial
losses. While some sophisticated investors with experience trading on
margin understand the associated risks with this type of trading, some
brokers who recommend this strategy are often less than upfront about
the downside and the risks involved.
If you have lost money due to the misconduct of your account involving
margin or if your broker traded in your account on margin without your
permission or without properly explaining the risks of margin trading
to you, you could have a claim against your broker or brokerage firm.
Contact one of our investment fraud attorneys today to discuss your potential
initial consultations are free and all of our cases are handled on a contingency fee basis.