The markets must be doing well - retail investor margin loans are up, and that could be a sign of a market top - or more significantly, an impending decline.
Margin loans were a significant factor in investor losses in 1987, and again in late 2001. While there have been a number of changes to margin rules over the decades, the problem is apparently rearing its head again. Do retail investors really have such a problem with short-term memory?
The NASD is trying to make sure that doesn't happen - and today released an Investor Alert - "Investing with Borrowed Funds: No "Margin" for Error" at its web site.
The Alert explains margin risk and provides basic information about margin transactions.
Brokers - make sure that your margin customers understand these risks and review this alert - an educated investor is your best defense from that belated suitability claim.
Investors - read the alert, understand the alert and ask questions if you do not understand it.
The highlighted points for customers:
The firmcan force the sale of securities in your accounts to meet a margin call
The firm can sell your securities without contacting you
The customer is NOT entitled to choose which securities or other assets in the accounts are sold
The firm can increase its margin requirements at any time and is not required to provide you with advance notice
Customers are NOT entitled to an extension of time on a margin call
Customers can lose more money than you deposit in a margin account
The use of margin can significantly enhance profitability of an account, but it also significantly increases risk. If you have questions regarding the use of margin in an account, feel free to email me at astarita@beamlaw.com
