A brokerage company has the right to ask a client to increase the amount of capital he has in a margin account, to sell the investor`s securities if the broker feels that his own resources are threatened, or to sue the investor if he does not fill a margin call or if he has a negative balance in his account. If the equity of a margina account is less than the maintenance margin level, the brokerage will make a margin call to the investor. In a number of days – usually within three days, although there may be fewer in certain situations – the investor must deposit more cash or sell shares to compensate for some or all of the difference between the price of the security and the maintenance margin. Investors and brokerage firms must sign an agreement before opening a margin account. Under the terms of the agreement established by FINRA and the Federal Reserve Board, the account must be subject to a minimum margin before investors can trade on the account. The minimum or initial margin must be at least $2,000 in cash or securities. Mr. Smith has read articles on investor training who have said that the minimum requirement for a margin account is $2,000. However, if he attempts to open a margin account with Broker S, that broker`s clearing company will not allow him to trade with Margin at all.
Mr. Smith will then attempt to open a margin account with Broker T, and it is said that he will not open a margina account for him unless he deposits $20,000. As soon as an investor buys a margin, the maintenance margin comes into effect, requiring that at least 25% of the total market value of the securities be on the account at any time. Nevertheless, many brokers may require more than is stipulated in the margin agreement. , bonds or options – all with the broker`s cash loans. All margin accounts or the purchase of securities on the margin have strict rules and regulations. The margin of preservation is such a rule. It sets the minimum amount of equity – the total value of the securities on the margina account, minus all securities lent by the brokerage company – which must be in a margin account at any time, as long as the investor remains attached to the securities purchased. Although finra requires a minimum maintenance margin of 25%, many brokerage firms may require that up to 30% to 40% of the total value of the securities be available.
Brokers, like other lenders, have policies and procedures in place to protect themselves against market risks or security impairment and credit risk in which one or more investors cannot or do not want to meet their financial obligations to the broker. Among the options available to them, they have the right to increase their margin requirements or not to open marginal accounts. Margin is the purchase of securities on credit, while these securities are used as collateral for the loan. Any residual credit balance is the borrower`s responsibility. The way to avoid this is to understand that a broker is primarily a broker who will act to limit his financial exposure to rapidly changing markets. The broker is not a “tax preparer” and is not required to base his actions on the client`s tax situation. The broker is also not required to sell client choice securities. The only way to avoid balances is to ensure that you hold a “buffer” of sufficient capital in a margin account at any time, or to limit transactions to cash accounts, where an investor must pay for the entire trade on a timely basis. In the end, margina accounts require work on behalf of the debitor. Information about a share price is available from a number of sources. Indeed, many investors check these prices every day, if not several times a day. An investor is free to deposit additional money into a margin account at any time to avoid a margin call.