By: Julio Perez, Spring 2018 IAC Graduate Research Assistant
Now that we understand roughly how securities work and some different type of securities, let us discuss how to purchase securities. Perhaps you really want to buy a share of a company, but can’t quite get together the money for it. Well, if you buy the securities through a securities firm, they might just open up a risky margin account for you. A margin account effectively allows the investor to borrow funds from the firm, effectively allowing him to purchase securities he normally would not have financial access to.
Usually, the investor has to deposit a portion of the security’s purchase price into the account, which is called “margin.” Margin trading is extremely risky. FINRA’s predecessor, the National Association of Securities Dealers (NASD), issued an investor alert to better inform investors on how to avoid getting wiped out by poor investment choices. Some of the warnings given which have not already been covered include the fact that firms can increase the margin requirement at any time without notice, account holders are not entitled to an extension of time on a margin call, and account holders can lose more money than is deposited in a margin account.
Translated: “I really want to buy fruit leather securities, even if I have to borrow riskily to do so.”