Buying stock on margin etrade
We are issuing this investor guidance to provide some basic facts to investors about the mechanics of margin accounts. We encourage any investor reading this communication to also read Purchasing on Margin, Risks Involved with Trading in a Margin Account. However, in volatile markets, a broker may calculate the account value at the close and then continue to calculate calls on subsequent days on a real-time basis.
When this happens, the investor might experience something like the following:.
When looking at my online broker account, I see an account value, cash value and purchase power number. How are these calculated?
A customer has 1, shares of XYZ in his account. At some point early in the day the broker contacts the customer e. Shortly thereafter, on Day two, the broker sells the customer out without notice. So, based upon the subsequent decline, the broker decided to sell shares of XYZ before they could decline even further in value. Only because the market continued to decline did the broker exercise its right to take further action and sell out the account. The bottom line is that margin accounts require work on behalf of the customer.
Information about the price of a stock is available from any number of sources. In fact, many investors check these prices on a daily basis, if not several times a day. An investor is free to deposit additional cash into a margin account at any time in an attempt to avoid a margin call.
However, even if additional deposits are made, subsequent declines in the market value of securities in the account may result in additional margin calls. If an investor does not have access to funds to meet a margin call, he should probably not be using a margin account. While cash accounts do not provide the leverage that a margin account does, cash accounts are easier to maintain in that they do not require the vigilance that a margin account requires.
Each stock has a 25 percent maintenance margin requirement. The broker chose to sell out GHI. Jones is in a very high tax bracket, so the sale results in a large tax bill for him.
Jones is upset as he would have preferred the broker sell out either of the other two securities. JKL is a fairly stable stock so the broker requires only the standard 25 percent maintenance margin requirement on it.
MNO is more volatile, so the broker set a 40 percent "house" requirement on the stock. Finally, PQR has been experiencing a lot of volatility in recent months, so the broker set a 75 percent "house" requirement for that stock. The broker chose to sell out JKL. Young is upset because she thinks the broker should have sold out shares of PQR since it had the highest i.
It is important to remember that while customers borrow individually, brokers lend collectively. As such, brokers are concerned with overall financial exposure. In each example, the broker had numerous customers who had borrowed money against GHI and JKL. The way to avoid this is to understand that first and foremost a broker is an extender of credit that will act to limit its financial exposure in rapidly changing markets.
The only way to avoid sell outs is to make sure you maintain a sufficient equity "cushion" in a margin account at all times, or to limit trades to cash accounts, where an investor must pay for the trade in full on a timely basis. Brokers, like other lenders, have policies and procedures in place to protect themselves from market risk, or the decline in the value of securities collateral, as well as credit risk, where one or more investors cannot or refuse to meet their financial obligations to the broker.
Among the options available to them, they have the right to increase their margin requirements or choose not to open margin accounts. Margin is buying securities on credit while using those same securities as collateral for the loan. Any residual loan balance is the responsibility of the borrower. Shortly thereafter, the stock declined rapidly in value. The broker asked Mr. Smith attempted to open accounts at Brokers S and T, each firm conducted its standard credit review process.
Just a moment
They each made an inquiry to a securities industry data center and discovered that Mr. Broker S decided it did not want to do business with Mr. Smith at all, Broker T was only willing to retain his account with a substantial deposit. Any obligation to a broker should be taken as seriously by an investor as an obligation to a bank or other lender.
Failure to meet obligations to a broker may result in legal action against the customer and will almost certainly cause the broker to report the default to a data center. Individuals should participate in the securities markets only when they have the financial ability to withstand the risks and meet their obligations. It is important that investors take time to learn about the risks involved in trading securities on margin, and investors should consult their brokers regarding any concerns they may have with their margin accounts.
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When this happens, the investor might experience something like the following: What could the customer have done to avoid this?
Margin Trading | What is Trading on Margin | E*TRADE
What happened in the above 2 examples? What could customers Jones and Young have done to avoid this? What might have happened here? What could a customer have done to avoid this? Office of the Ombudsman. File a Regulatory Tip. Overview Initiate an Arbitration or Mediation Information for Arbitrators Information for Mediators. ABOUT FINRA Leadership FINRA Locations Careers Contact.
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