Don't Use a Margin Account

Don't Use a Margin Account

by Mary Suplee on Oct 4, 2018

Margin balances, the money that investors borrow to buy securities, had reached $652 billion by the end of August. That's roughly one year after the first time they exceeded $600 billion. Except in very rare circumstances, I can't see any reason for investors to use borrowed money to buy stocks. This not only applies to stocks but to all sorts of financial instruments, particularly variable insurance products and illiquid holdings such as limited partnerships.

If the markets go down enough, the securities you own on borrowed money can be sold to meet margin calls. You don't get to choose which securities in your account are sold, you don't get extended time to raise the additional cash, and you lose more money than you have on deposit with a margin call.

I don't like seeing this trend of increasing margin balances. Many brokerage firms make it a practice to open accounts as margin accounts. They tell investors that if they need money, they can draw against this account very easily by increasing their margin balances and they don't have to sell any securities or pay the taxes on them. This is all fine and dandy until something happens. If we have a crisis and you're forced to liquidate securities to cover a margin call, it can be a very expensive experience.

Make sure you understand what type of account you are opening, what your rights are and how much your firm is charging you. For more information about what you need to know before opening a margin account, read this investor alert at FINRA.

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