Increased potential loss
Just like the way using Margin magnifies your returns, it can also put you under the risk of increased loss. Let’s take a look at an example of margin risks:
Example: You have $20,000 worth of securities bought using $10,000 borrowed and $10,000 in cash. When the value of the securities drops by 25% to $15,000, since the amount you borrowed from your broker stays at $10,000, your equity becomes $5,000. That means your equity drops from $10,000 to $5,000, which is a 50% loss.
Potential maintenance call or liquidation of securities
When you use margin buying and fail to maintain your equity above the minimum margin requirement, you will receive a margin call which will require you to either liquidate part of the securities or deposit more assets to meet the requirement. Your broker will generally liquidate your securities when you fail to cover the margin call in 3 trading days.
You can lose more funds than you deposit in the margin account.
A decline in the value of securities that are purchased on margin may require you to deposit additional funds to avoid the forced sale of those securities or other securities or assets in your account(s).
The firm can force the sale of securities or other assets in your account(s)
If the equity in your account falls below the maintenance margin requirements, the firm can sell the securities or other assets in any of your accounts held at the firm to cover the margin deficiency. You also will be responsible for any short fall in the margin investing account after such a sale.
The firm can sell your securities or other assets without contacting you.
Some investors mistakenly believe that a firm must contact them for a margin call to be valid, and that the firm cannot liquidate securities or other assets in their accounts to meet the call unless the firm has contacted them first. This is not the case with margin investing. The firm can take necessary steps to protect its financial interests, including immediately selling the securities without notice to the customer.
You are not entitled to choose which securities or other assets in your account(s) are liquidated or sold to meet a margin call.
Because the securities are collateral for the margin loan, the firm has the right to decide which security to sell in order to protect its interests.
For complete disclosure on margin risks, please see the Margin Disclosure Statement.