Trading “on margin” means you’re investing with money you borrowed from your brokerage firm. For example, if you have $100,000 invested with your brokerage firm, you can offer those investments as collateral for a loan. Investors use margin accounts to leverage their investments and increase their purchasing power.
Brokerage firms charge a high interest rate on money borrowed on margin. If the market tanks and you lose the money you borrowed, you are personally liable to repay all of it, plus interest. Oftentimes, even if you make a moderate gain on your investments, you will still lose money due to the high interest rate.
If the margin account’s equity drops below the maintenance margin level, a margin call will be made, forcing you to bring it back up to the required amount immediately. Investors who cannot satisfy margin calls can have large portions of their accounts liquidated.
Margin trading is almost always a bad idea for the average investor. Every month your returns don’t beat the interest rate, your account goes down in value. As it does, you’ll have to continue to meet margin calls, and the returns you need to meet the interest payments will keep going up. In the worst-case scenario, you can end up losing your original collateral investment and owing a significant amount more in interest.
A broker’s failure to properly disclose the risks associated with a margin account, or to follow a customer’s instructions not to trade on margin, can constitute grounds for recovery of associated losses. If your broker did not fulfill this responsibility, you should have an experienced investor rights attorney review your case.
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