When you buy stocks on margin, your brokerage lends you part of the purchase price. This loan increases your exposure to variations in the market. In the best case, stocks increase in value, and you enjoy greater gains. If stocks decline in value, however, margin buying magnifies your losses. The law gives your broker substantial control and puts you at risk if you don't pay a margin call.
Your brokerage sets forth the conditions of your margin account in your account agreement. According to the U.S. Securities & Exchange Commission, the standard agreement requires you to adhere to regulations of the New York Stock Exchange and other agencies. However, each brokerage can also add its own conditions, such as the loan interest rate, repayment rules and collateral requirements.The Financial Industry Regulatory Authority (FINRA) requires you to maintain a minimum equity of 25 percent of the market value of stocks in your account. However, brokerages have the authority to require a higher percentage.
If you can't meet the margin deadline, the firm may allow you extra time. However, it has no legal requirement to do so, according to FINRA. Even if the firm has given you a margin call, it can sell your stocks before the deadline without informing you. In fact, your brokerage firm can institute a margin call without ever contacting you at all. The margin call is purely a matter of courtesy, not a legal requirement.
Your brokerage can sell securities in a margin account without your permission if your equity falls below the firm's minimum, according to FINRA. It can also increase the minimum requirements at any time without notice. A brokerage can change the requirements only for certain stocks, and it can even require 100 percent equity. The firm can sell any or all of the securities in the account to make up for losses. You don't have the right to determine which securities to sell if you don't pay a margin call.
Losses and Interest
You can lose a large amount of money quickly if you can't meet a margin call. During a rapid market decline, you can end up owing the brokerage money after all of your stocks are sold. Similar to a homeowner who is underwater on a mortgage, your equity doesn't cover what you borrowed. However, you are still responsible for the money you owe the brokerage plus the interest.
- Financial Industry Regulatory Authority: Understanding Margin Accounts -- Why Brokers Do What They Do
- Financial Industry Regulatory Authority: Investor Complaint Center
- U.S. Securities and Exchange Commission: Beginners' Guide to Investing
- U.S. Securities & Exchange Commission: Tips for Online Investing
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