Did your broker recommend you invest on margin? Did you suffer losses as a result of your broker’s suggestion? A lawyer dedicated to margin loss could help you get your money back.
Brokers and financial institutions have an obligation to ensure that the investment recommendations made to investors are vetted and suitable. They also need to ensure that investors have a clear understanding of what the investment is—and the risks. When a broker fails to uphold this duty, they can be held accountable for any losses that may result.
One common cause of investment losses are margin calls. If your broker failed to inform you of the risks, you may be entitled to financial compensation. Get help filing a complaint with the Financial Industry Regulatory Authority (FINRA) by contacting a reputable margin loss lawyer at Wolper Law Firm.
What Are Margin Losses?
When you buy stock on margin, you’re essentially buying stock using a loan from your brokerage firm. Margin losses occur when the value of an investor’s stock diminishes and the financial institution issues what’s called a margin call.
When the brokerage firm issues a margin call, investors only have a limited amount of time to either make a deposit or take action to increase the value of the stock. If the investor is unable to do so, the broker-dealer can then sell the stock in order to recover the lost value. This sometimes results in catastrophic losses for investors.
Since margin calls can happen with fluctuations in financial markets, you might be wondering why someone would take the risk of buying on margin. Investors will often buy on margin in order to purchase more stock than they would normally be able to. As you can imagine, this is not always a suitable investment strategy.
If your broker suggested that you purchase stock on margin and you suffered considerable losses on a margin call, you may be entitled to full restitution. Your lawyer can help you figure out whether you have grounds for a FINRA arbitration complaint.
FINRA Arbitration for Margin Loss
FINRA arbitration is one of the best options for investors who hope to recover margin losses. Here, a panel of arbitrators will hear your case and listen to your broker defend their decisions before determining whether you should be paid restitution.
Arbitration is similar to what court would be like—with some key differences. Some of the reasons why arbitration is often favored over court proceedings include:
- The length of the claims process
- The ability to appeal
- The amount of time to repay the victim
- Arbitrators as opposed to a judge/jury
Risks of Using Margin
While using margin carries the potential to enhance an investor’s return, it also magnifies the risk in the account. If the securities that collateralize the margin loan decline in value, the investor may experience a margin or maintenance call from the brokerage.
In the event of a margin or maintenance call, the investor must either deposit additional assets into the account or liquidate securities to reduce or altogether eliminate the margin balance. If remedial action is not taken by the client to meet the call, the brokerage will often involuntarily liquidate securities in the client’s account to meet the margin call.
An example of trading and investing using margin is the following: You want to purchase $100,000 worth of stock but you only have $50,000 in your brokerage account. The brokerage will loan you the extra $50,000 and charge you interest on the loan. The loan is secured by the stock that is in the account. If the price of the stock increases, the investor has the potential to make more money that they otherwise would have made if the investment was limited to $50,000. However, if the price of the stock decreases, the investor may lose their $50,000 and still owe the brokerage the borrowed funds, thus magnifying the losses.
Duty of Brokerage Firms and Financial Advisors
Financial advisors owe several duties to a client before they can recommend the use of margin. The failure of a Financial Advisor to fulfill these duties will subject the brokerage firm to liability. Among the duties include the following:
- To discuss with the client the risks associated with the use of margin, including the risk of principal loss beyond the value of the account.
- To discuss with the client whether they have the financial ability to absorb a complete loss of principal in the account.
- To discuss with the client the nature and type of collateral supporting the margin loan and how it may impact the risk characteristics of the margin loan.
- To discuss with the client the rate of interest charged by the brokerage firm for the borrowed funds.
- To discuss with the client the margin limits and maintenance requirements imposed by law and the brokerage firm.
- To discuss with the client their obligations in the event there is a margin call.
In addition, to the extent a margin loan is extended, the brokerage has further duties:
- To ensure that the margin maintenance requirements are met and that the client does not become over-extended.
- To ensure that clients are kept informed regarding margin calls and given an opportunity to deposit additional collateral to meet a call instead of the involuntary liquidation of securities by the brokerage.
- If liquidation becomes necessary, to do so in an orderly way that puts the client’s interest first.
How Can the Wolper Law Firm Help?
The Wolper Law Firm has extensive experience handling matters involving securities backed lending. If you have experienced margin calls or investment losses due, in whole or in part to the use of margin, or otherwise believe that the use of margin has been improperly recommended, please call the Wolper Law firm for a free consultation and case evaluation. Call 800.931.8452 to schedule a free, no-obligation consultation with one of our investment loss recovery attorneys.
What Are Margin Calls?
Margin calls are issued by financial institutions when the value of a person’s stock diminishes in value. This can happen due to simple fluctuations in the stock market or because of more serious events, as was the case with the COVID-19 global pandemic.
When a margin call is issued, investors will have to take action to raise the value of their financial instruments, usually by making a deposit to the account. If the investor is unable to do so, the brokerage firm can then sell the investor’s stock in order to make up the difference.
Although purchasing on margin has its benefits, it is not a suitable recommendation for every investor. If your broker failed to inform you of the risks of purchasing on margin, misled you, or is otherwise responsible for your losses, they could be compelled to repay you by a panel of FINRA arbitrators.
Recovering Losses Caused by Margin Calls
One of the most common ways that wronged investors seek to recover their losses is by filing a FINRA arbitration complaint. This is similar to litigation in process, but there are many differences.
You will start by filing your complaint. If FINRA agrees to hear your case, you will have a chance to plead your case and have your irresponsible broker explain their reasoning for suggesting that you invest on margin. The arbitrators will then carefully review the evidence and determine if negligence or misconduct occurred and whether you should be awarded restitution.
If the arbitrators come down in your favor, they can then order the liable party to repay you within thirty days of the decision. What’s more, many FINRA arbitration claims can be resolved in as little as eighteen months.
Meet with a Lawyer About Your Margin Losses
If you purchased stock on margin and suffered devastating losses, you may be entitled to restitution. Contact a respected margin loss lawyer at Wolper Law Firm to discuss the circumstances of your case. We provide complimentary consultations to wronged investors across the U.S. Take advantage of this opportunity when you call 800.931.8452 or complete the online contact form provided below.
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