Excessive Use of Leverage and Margin

Brokers frequently encourage investors to borrow against their account assets to buy additional securities. Known as ‘buying on margin’, this tactic poses some inherent risks to the investor. Using a margin account to make purchases basically means that they are borrowing money from the brokerage firm to make the transaction. They are required to pay interest on any balance owed to the firm, generating substantial profits because firms usually receive fees based on the amount of a client’s margin loans. Brokers have a duty to make sure that the investor can both understand and tolerate the financial risks associated with margin transactions. If they encourage this activity without taking these precautionary steps, they are in violation of securities industry rules, including FINRA’s guidelines for communication with the public, and be held liable for any resulting losses.