Our Margin Trading Lawyers Will Help Investors Suffering a Loss from Excessive Use of Leverage and Margin Trading
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 trading. 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. When the worst happens, our stock market loss attorneys are here to help you take legal action.
How Does Margin Trading Work?
As mentioned above, margin trading involves borrowing money from your brokerage firm. This allows you to invest more money than you have; and, while this increases your potential returns, it also increases your potential losses.
But, not only does margin trading increase your potential losses—it could even put you in debt. For example, let’s say your broker talks you into borrowing $10,000 to do some stock trading on margin. Your broker explains that your returns will more than cover the interest; and, when you sell the stock the proceeds of the sale will automatically pay off the loan.
But, what your broker doesn’t explain is what will happen if the investment loses money. Now, let’s say this happens. All of a sudden, you borrowed $10,000, but you only have $8,000 left. In this scenario, not only are you still liable to repay the full $10,000, but you must also pay interest on the full amount of the loan at the rate to which you previously agreed.
What are the 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.
When Can Investors Who Traded on Margin Pursue Claims for Fraud?
Due to the risks involved with margin trading, it is not well-suited for most individual investors. Unfortunately, this does not stop brokers from recommending it. While recommending that investors trade on margin is not inherently fraudulent, investors who lost money with margin trading will have fraud claims in many cases. For example, you may be entitled to recover your losses if:
- Your broker provided unsuitable investment advice (i.e. it was not in your best interests to trade on margin)
- After convincing you to trade on margin, your broker overconcentrated your portfolio
- Your broker did not adequately disclose the risks of margin trading
- Your broker did not adequately disclose the fees and costs you would incur
- Your broker recommended trading on margin to serve his or her own interests (i.e. to generate fees and commissions) instead of serving yours
- Your brokerage firm charged excessive fees or interest for your margin trading
- Your brokerage firm unnecessarily sold assets in your portfolio at a distressed price to cover a margin call
Proving fraud in cases involving margin trading requires access to all relevant documentation. As a result, you should collect any prospectuses or other documents your broker provided you in connection with the margin trading he or she recommended. You should preserve copies of all written or recorded communications with your broker as well, and you should download or print your account statements from the relevant time period.
When you contact us, our lawyers will review your documentation to determine if you have a claim for fraud. If you do, we will file an arbitration claim with the Financial Industry Regulatory Authority (FINRA) on your behalf. At this stage, your brokerage firm may agree to settle your claim; or, our lawyers may need to take your claim before a FINRA arbitration panel. In either scenario, we will make sure you have a clear understanding of the losses you are entitled to recover, and we will help you make informed decisions about protecting your legal rights.
Our Margin Trading Attorneys Can Provide Legal Advice and Assistance After a Loss
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 margin trading 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.