| Margin
Requirements
The terms on which firms can extend credit for securities
transactions are governed by federal regulation and by the rules of the
NASD and the securities exchanges. This investor guidance focuses on the
requirements for marginable equity securities, which includes most
stocks. Some securities cannot be purchased on margin, which means they
must be purchased in a cash account, and the customer must deposit 100%
of the purchase price. In general, under Federal Reserve Board
Regulation T, firms can lend a customer up to 50% of the total purchase
price of a stock for new, or initial purchases. Assuming the customer
does not already have cash or other equity in the account to cover its
share of the purchase price, the customer will receive a margin call
from the firm. As a result of the margin call, the customer will be
required to deposit the other 50% of the purchase price,
The rules of the NASD and the exchanges supplement the requirements
of Regulation T by placing "maintenance" margin requirements
on customer accounts. Under the rules of the NASD and the exchanges, as
a general matter, the customer's equity in the account must not fall
below 25% of the current market value of the securities in the account.
Otherwise, the customer may be required to deposit more funds or
securities in order to maintain the equity at the 25% level. The failure
to do so may cause the firm to force the sale of - or liquidate - the
securities in the customer's account in order to bring the account's
equity back up to the required level.
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Margin Transaction-Example
For example, if a customer buys $ 100,000 of securities on Day 1,
Regulation T would require the customer to deposit margin of 50% or
$50,000 in payment for the securities. As a result, the customer's
equity in the margin account is $50,000 and the customer has received a
margin loan of $50,000 from the firm. Assume that on Day 2 the market
value of the securities falls to $60,000. Under this scenario, the
customer's margin loan from the
firm would remain at $50,000, and the customer's account equity would
fall to $10,000 ($60,000 market value less $50,000 loan amount).
However, the minimum maintenance margin requirement for the account is
25%, meaning that the customer's equity must not fall below $15,000
($60,000 market value multiplied by 25%). Since the required equity is
$15,000, the customer would receive a maintenance margin call for $5,000
($15,000 less existing equity of $10,000). Because of the way the margin
rules operate, if the firm liquidated securities in the account to meet
the maintenance margin call, it would need to liquidate $20,000 of
securities.
Firm Practices
Firms have the right to set their own margin requirements-often
called "house" requirements-as long as they are higher than
the margin requirements under Regulation T or the rules of the NASD and
the exchanges. In today's market, some firms have raised their
maintenance margin requirements for certain volatile stocks (such as
stocks of companies that sell products or services via the Internet) to
help ensure that there are sufficient funds in their customer accounts
to cover the large swings in the price of these stocks. These changes in
firm policy often take effect immediately and may result in the issuance
of a maintenance margin call. Again, a customer's failure to satisfy the
call may cause the firm to liquidate a portion of the customer's
account.
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Margin Agreements and
Disclosures
If a customer trades stocks in a margin account, the customer needs
to carefully review the margin agreement provided by his or her firm. A
firm charges interest for the money it lends its customers to purchase
securities on margin, and a customer needs to understand the additional
charges that he or she may incur by opening a margin account. Under the
federal securities laws, a firm that loans money to a customer to
finance securities transactions is required to provide the customer with
written disclosure of the terms of the loan, such as the rate of
interest and the method for computing interest. The firm must also
provide the customer with periodic disclosures informing the customer of
transactions in the account and the interest charges to the customer.
Loans From Other Sources
In some cases, firms may arrange loans for customers from other
sources, and there have been instances of customers making loans to
other customers to finance securities trades. A customer that lends
money to another customer should be careful to understand the
significant additional risks that he or she faces as a result of the
loan, and needs to carefully, read any loan authorization forms. A
lending customer should be aware that such a loan may be unsecured and
may not be eligible for protection by the Securities Investor Protection
Corporation (SIPC). The firm may not, without direction from the
borrowing customer, transfer money from the borrowing customer's account
to the lending customer's account to repay the loan.
Additional Risks Involved With Trading On Margin
There are a number of additional risks that all investors need to
consider in deciding to trade securities on margin. These risks include
the following:
- 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 provide additional funds to the firm that has made the
loan to avoid the forced sale of those securities or other securities in
your account.
- The firm can force the sale of securities in your account. If the
equity in your account falls below the maintenance margin requirements
under the low-or the firm's higher "house" requirements-the
firm can sell the securities in your account to cover the margin
deficiency. You will also be responsible for any short fall in the
account after such a sale.
- The firm can sell your securities without contacting you. Some
investors unmistakenly believe that firm must contact them for a margin
call to be valid, and that the firm cannot liquidate securities in their
accounts to meet the call unless the firm has contacted them first. This
is not the case. As a matter of good customer relations, most firms will
attempt to notify their customers of margin calls, but they are not
required to do so.
- You are not entitled to an extension of time on a margin call.
While an extension of time to meet initial margin requirements may be
available to customers under certain conditions, a customer does not
have a right to the extension. In addition, a customer does not have a
right to an extension of time to meet a maintenance margin call.
It is important that investors take time to learn about the risks
involved in trading securities on margin, and investors should consult
their brokers regarding any concerns they may have with their margin
accounts.
Additional Information
For additional information on margin in the context of online
trading, investors should read NASD Notice to Members 99-11 (February
1999) and the Securities and Exchange Commission's (SEC) Tips for Online
Investing at the SEC Web Site.
(c) Copyright 1999, NASD Regulation, Inc. All rights reserved. Please
read our Copyright and Trademark notices and Disclaimer.
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PAYMENT FOR ORDER
FLOW DISCLOSURE
Freedom Investments, Inc. periodically will advise you of certain
order practices, which are of importance to you. In that connection,
please be advised that in the ordinary course of business, Freedom may
direct orders to purchase and sell securities that have been entrusted
to us, by you, with a market other than the Primary Market for those
securities.
Our decision to place orders on any of these markets may be
determined based on the competitiveness of that market of the security
in question, or on other factors, including a payment which we may
receive for order flow.
In all cases, the alternated market shall be required by Freedom to
compete with the best available bid or offer shown in the Primary
Market, and would be required to match sales with respect to volume with
the Primary Market.
It is important that we advise you that Freedom may receive
remuneration for placing orders in an alternate market. Such
remuneration is in the form of rebates. Such rebates may vary from time
to time, but will not exceed two cents per share.
If at any time you wish to have an order placed for your account on a
specific market we will be happy to accommodate your wishes, and the
order will be placed in the market specified by you at the time you
place the order. We do not believe that the aforementioned practices
compromise the execution of your orders and are generally in line with
industry practices. Should you have any questions, please feel free to
contact Freedom Investment's customer service department.
Investors should also be aware of the availability of information
from the
National Association of Securities Dealers (NASD) as follows:
The NASD Regulation Inc. Public Disclosure Program Hotline Number is
(800) 289-9999.
The NASD Regulation web site address is www.nasdr.com. An investor
brochure that includes information describing the NASD Regulation Public
Disclosure Program, may be obtained via the NASDR web site or through
NASD media source at (301) 590-6142.
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Nothing herein is to be construed as a
solicitation of any transaction. The information presented has been
obtained from sources considered to be reliable, but it is not purported
to be complete or without error. Freedom Investments Inc. and Fahnestock
& Co. Inc. and/or the officers and directors, and/or members of
their families, may at times have positions in any securities mentioned. |
