On 18 January, FINRA issued alert on investing with borrowed money.
- Re-issued alert as investors may underestimate risk of margin trading and calls.
- Investor purchases of securities "on margin" averaged $592bn, up to Nov. 2017.
- Purchases exceeded the $600 billion mark in Oct. 2017, for first time in history.
- Warn investors of potential margin calls that may wipe out all their investments.
- Borrow money from brokerage firm to purchase securities, deposit called margin.
- Loan from firm is secured by securities purchased, margin call if value has fallen.
- Must repay amount borrowed and interest, even if lost money on the investment.
- Interest cost paid on amount borrowed until repaid, with rates varying based on
broker call rate or call money rate and borrowed amount, and profitable or firms.
- FINRA Rule 4210 requires deposit $2000 or 100% of purchase price, where lower.
- As well as initial margin, also must keep maintenance margin within the account,.
- Firms may have extra requirements depending on security, liquidate if it changes.
Risks and Warning
- Firm can sell securities in accounts to cover the margin deficiency, responsible for.
- No requirement to notify prior to margin sales, most try but not mandatory at all.
- No right to control liquidation decisions, influence which securities are sold for call.
- Changes in firm policy often effect immediately, no notice, can be unexpected call.
- Not entitled to time extension on margin call, no requirement, can be immediate.
- Fall in value of securities may mean further payment needed to avoid margin call.
- May have to continue to pay interest on open short, even if, delisted, not trading.
- Investment not appropriate for most lay people, need to know risks and research.