Volatility is a natural part of investing in the stock market. The market follows a natural pattern of highs and lows (bull and bear markets). Investors who wish to grow their money can make a return on their initial investment by learning and making prudent decisions. Often, the most prudent decision, both for practical and financial reasons, is to have someone else manage your assets. This is where brokers and financial advisors come into play. These financial professionals are trained and have gained specialized knowledge into how best return value to their clients. But, even with the built in volatility of the market, each investor has the option to be as risky or as conservative as they want to be with their money. One risk some are willing to take is investing on a margin. But what happens if this goes wrong? Can you sue your advisor after a loss due to a margin call?
What is a margin call?
A margin account serves as a brokerage account enabling brokers to provide investors with cash to acquire stocks or other financial products. The act of purchasing stocks using borrowed funds is commonly referred to as leveraging. However, it’s important to note that leveraging amplifies the risk of potential losses.
A margin call is a demand from a brokerage firm or lender for an investor to add additional funds or securities to their margin account. This request is made when the value of the securities held in the margin account falls below a certain threshold known as the maintenance margin. The purpose of a margin call is to ensure that the investor has enough collateral to cover potential losses in case the value of their investments continues to decline. If the investor fails to meet the margin call by depositing additional funds or securities, the brokerage firm may liquidate some or all of the investor’s positions to reduce the risk of losses. Margin calls are a risk management measure used by brokerage firms to protect themselves and investors from excessive losses.
Are investors liable for losses incurred after a margin call?
Well, this depends. If you’re an investor who has a margin account because you expect risks and high-returns, then your broker probably advised you of the pros and cons of such an account.
However, say you’re a more conservative investor. You have placed your investments in an account you believed would safeguard your money and return modest gains over a longer-period of time. However, one day the market turns sour and your nest-egg is now facing a serious downturn due to a margin call. You might ask yourself; Why is my money even being used this way?
If a brokerage firm suggests an unsuitable investment strategy that involves a significant margin, and the market experiences a downturn resulting in losses for the investor, there may be grounds for a potential FINRA arbitration claim against the broker. Most broker dealers possess broad authority in handling margin calls based on rigorous margin agreements. In some cases, brokers may even liquidate investors’ portfolios without prior notice, although they are expected to act in good faith. In situations like these, we recommend contacting an attorney with experience handling securities issues and FINRA arbitration cases.
