Excessive Use of Leverage and Margin


Securities Fraud Attorneys

Investors are often encouraged to borrow against the assets in their accounts in order to purchase additional securities. This approach, known as “buying on margin,” comes with inherent risks to the investor. When investors use a margin account to buy securities, they are borrowing money from the brokerage firm to purchase the securities.  An investor who purchases securities on margin is obligated to pay interest on any balance owed to the brokerage firm.  Brokers and their firms often generate substantial profits from margin loans because they typically receive fees based upon the amount of their customers’ margin loans.

Most investors are unaware of the level of risk associated with margin transactions. Before entering into a margin transaction, brokers have a duty to evaluate the investor’s ability to tolerate the financial risks and to make certain that the investor fully understands the risks involved. When a broker encourages the use of margin without taking these precautionary steps, the broker may be in violation of industry rules, including FINRA rules relating to communications with the public, and may be liable for any resulting financial losses.

Risks of Margin Transactions

The risks inherent in margin transactions are a result of the unpredictability and volatility of the stock market combined with the interest and costs associated with margin accounts. In order to generate profits on these transactions, the securities must perform well enough to cover the purchase price, brokerage commissions and all interest charged on the loan. While margin may be an effective tool for sophisticated investors capable of handling the financial risks, margin poses serious risks and is often inappropriate for the average retail investor.

When the value of the securities in an account using margin declines sufficiently, the brokerage firm will issue a margin call. A margin call means that the brokerage firm will require the investor to provide more collateral to secure the margin loan and cover the decrease in the value of the securities. The investor can either deposit more money or additional securities into the account. If the investor does not have the additional funds or securities required, the firm will sell the securities, often at a distressed price into a declining market, to satisfy the margin call. The results can be devastating:  the investor will have realized losses, but will still owe the full amount borrowed, less any proceeds resulting from the sale of the securities.

Our Stock Broker Fraud Attorneys Can Provide Legal Advice and Assistance

Zamansky LLC is a premier New York City securities fraud law firm located in the heart of Wall Street. Our firm has recovered millions of dollars in stock broker fraud and securities arbitration cases against brokers and their investment firms. We have extensive experience representing clients who have suffered substantial financial losses as a result of a broker’s excessive use of margin.  A skilled investment losses lawyer at our firm will work with you to evaluate your investment history and investigate your claim. When brokers do not adequately explain the dangers involved in margin transactions, investors face substantial risks and are unfairly subject to financial losses. Our stock market fraud lawyers can help you recover your losses.

To learn more about how our firm can assist you with an excessive use of margin case, contact our securities fraud law firm today to schedule a free, no-obligation consultation. We respond to all inquiries within 24 hours and you can reach us by phone at (212) 742-1414 or by completing the contact form.