Stoltmann Law Offices is investigating the use of margin. Brokers and brokerage firms utilize margin in order to gain large commissions, even though the use of margin may not be suitable for that investor. A broker must do his due diligence on every security he recommends or sell, and, if he does not, his brokerage firm may be held liable for investment losses on a contingency fee basis in the Financial Industry Regulatory Authority (FINRA). The use of margin may not be suitable for investors who are elderly, do not have a high net worth, do not have a high risk tolerance, and may not be sophisticated investors.
Buying on margin refers to the practice of buying an asset where the buyer pays only a percentage of the asset’s value and borrows the rest from the banker or broker. The broker acts as a lender, and he uses the funds in the securities account as collateral on the loan’s balance. The margin is the amount the investor puts down on the account in a percentage. Margin risks include:
Investors can lose more funds than deposited in the margin account
The firm can force the sale of securities in margin accounts
The firm can sell your securities without contacting you
The investor is not entitled to an extension of time on a margin call
Open short-sale positions could cost the investor unnecessary fees
Margin lending can be a major profit center for Wall Street, and it gives many stockbrokers incentive to recommend margin to their clients without disclosing all of the risks associated with that. Brokerage firms are able to earn multiple revenue streams by incentivizing its brokers to promote these unsuitable leverage vehicles, by earning interest on the loan and fees, commissions and markups on investment products. In 2017, margin debt was at an all-time high of almost 700 billion dollars.
If your broker recommended to you buying a security on margin, you may be able to sue your brokerage firm in order to recover your investment losses.
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