A margin disclosure statement is used to inform an investor of the risks that come with buying on margin. When a person establishes a relationship with a broker he will often have the option of paying outright or borrowing from the broker to purchase securities and other products. If he plans to borrow and qualifies, he can open a margin account. Margin refers to the amount of money an investor must personally provide.
A firm’s disclosure statement should highlight risks, but it should also go into detail about how the firm specifically handles its margin accounts. A client needs to know the amount of interest charged on loans and how that interest is calculated. He should be aware if he is required to maintain an excess margin balance daily or if he has a bit more leeway. The statement should also inform a client if a margin account is required to short sell securities.
What to Take from a Margin Disclosure Statement
The margin disclosure statement exists because there truly is great risk involved with buying on margin. Much like gambling, one loss can quickly snowball. If this happens, an investor can find himself in a lot of trouble with a broker. Usually people buy on margin because they see the opportunity to turn a large profit on the market and they need the money or securities to make it happen. Unfortunately, if it does not work out, they can be in debt for quite a bit of cash.
A margin call is a demand from the broker to the investor. When called, the investor must pay a specified amount of money or the equivalent in assets to the firm. Before buying on margin either with a traditional or online service, it is important to read and go over all aspects of the margin disclosure statement.