A customer who purchases securities may pay for the securities in full or may borrow part of the purchase price from his or her securities firm. If you choose to borrow funds from your stockbrokerage firm, you will open a margin account with the firm. The portion of the purchase price that you must deposit is called “margin” and is your initial equity in the account. The loan from the firm is secured by the securities that are purchased for your account.
Customers generally use margin to leverage their investments and increase their purchasing power. At the same time, customers who trade securities on margin incur the potential for higher losses. As a result, there are additional risks involved with trading on margin that your broker must disclose to you. These risks include that you can lose more funds than you deposit in the margin account. Another risk is that your firm can force the sale of securities in your account or sell your securities without contacting you.
If you choose to trade securities on margin you should also know that you are not entitled to an extension of time on a margin call. When the margin ratio in the account exceeds the requirements by the firm, you are susceptible to a margin call, which could force the sale of your securities. Your broker is responsible, under the law, to advise you of these risks and all others related to trading securities on margin.
If you believe that your broker failed to disclose the risks of purchasing securities on margin or you think you may have been a victim of any other type of securities fraud, you have certain rights which you should be aware of, rights which may provide you an opportunity to recover your losses from your stockbroker or brokerage firm.