While reading this section, many of you will say, “Wow, Margin is really dangerous and I don’t want
to use it!” Admittedly, the use of Margin is a dangerous tool but it can be controlled and used to magnify
and extend your profit making. You simply must understand that before you use
this added power, you must have an established investing plan, and that plan must have a healthy dose of
Risk Management within it.
Margin is generally used to increase the buying power in your account. In a margin account, the client borrows
funds from the broker/dealer to pay part of the total investment cost of the stock purchased. In essence,
the broker/dealer is your lender. This loan is secured by value of the securities held in the account.
As with any loan, interest is charged. Interest charged to the account is reported on the monthly Client
Statement. The written disclosure of the terms of the loan is included in your Broker’s Terms and Conditions.
Clients must sign a margin agreement in order to trade on margin.
Key Points of Margin Use:
You can lose more funds than you deposit in the margin account.
A decline in the value of securities that are purchased on margin may require you to provide additional funds to the
firm that has made the loan to avoid the forced sale of those securities or other securities in your account.
The broker/dealer can force the sale of securities in your account.
If the equity in your account falls below the maintenance margin requirements under the law, or the firm's higher "house"
requirements, the firm can sell the securities in your account to cover the margin deficiency. You also will be responsible
for any shortfall in the account after such a sale.
The broker/dealer can sell your securities without contacting you.
Some investors mistakenly believe that a broker/dealer must contact them for a margin call to be valid, and that
the firm cannot liquidate securities in their accounts to meet the call unless the firm has contacted them first. This is not the
case. Most firms will attempt to notify their customers of margin calls, but they are not required to do
so. However, even if a firm has contacted a customer and provided a specific date by which the customer can
meet a margin call, the firm can still take necessary steps to protect its financial interests, including
immediately selling the securities without notice to the customer.
You are not entitled to choose which security in your margin account is liquidated or sold to meet a
margin call. Because the securities are collateral for the margin loan, the firm has the right to
decide which security to sell in order to protect its interests.
The broker/dealer can increase its "house" maintenance margin requirements at any time and is not
required to provide you with advance written notice. These changes in firm policy often take effect immediately
and may result in the issuance of a maintenance margin call. Your failure to satisfy the call may cause
the member to liquidate or sell securities in your account.
You are not entitled to an extension of time on a margin call. While an extension of time to meet
margin requirements may be available to customers under certain conditions, a customer does not have a right to the extension.
Margin can only be used in a regular account. Additionally, you may only Short sell a stock through a margin account.
You will have to check with your individual brokerage as each may have specific requirements for the use of margin accounts.
As a quick example, most stocks over $5/share are marginable, however, many brokerages will only allow margin to be used on
stocks that are at least $10/share. Most retirement accounts are not marginable. These include 401K plans, Roll-overs, Keogh,
IRA’s and Roth IRA’s.