Investors generally use margin to leverage their investments and increase their purchasing power.
A margin account allows an investor to use leverage and to take advantage of a greater range of trading strategies. A margin account requires margin equity of at least $2,000. Margin equity consists of cash plus the market value of marginable securities in the margin account.
In addition, the investor must agree to the rules and regulations of a margin account in order to open a margin account. An investor may be able to purchase securities using margin, sell stocks short, and trade option strategies.
By using qualifying securities as collateral, the investor can borrow money to meet initial margin requirements of a transaction, or withdraw money. The investor pays interest on the money that is borrowed in the margin account and must eventually repay the loan. A margin account also offers a greater range of trading strategies; however, because of the leverage associated with this type of account, a margin account also carries more risk than a cash account.
These risks include:
A customer can lose more funds than the initial deposit into the margin account
A decline in the value of securities that are purchased on margin may require a customer to provide additional funds to avoid the forced sale of those securities or other securities in the account.
The firm can force the sale of securities in a customer’s account
If the equity in a customer’s account falls below the maintenance margin requirements under the law, or the firm’s higher “house” requirements, the firm can sell securities in the account sufficient enough to cover the margin deficiency. The customer will also be responsible for any shortfall in the account after such a sale.
The firm can sell a customer’s securities without contacting the customer
Some investors mistakenly believe that a firm must contact them for a margin call to be valid and that the firm cannot liquidate securities in their accounts to meet the call unless the firm has contacted them first.
This is not the case. As a courtesy, OptionsHouse will, whenever possible, make a best efforts attempt to notify their customers of margin calls, but is not required to do so.
Customers are not entitled to an extension of time on a margin call
There are no extensions of time to meet a maintenance margin call.
It is important that investors take time to learn about and understand the risks involved in trading securities on margin. Investors should contact OptionsHouse regarding any concerns they may have with their margin accounts.