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NASD Warns Over Increasing Margin Use In Securities Transactions

by Philip Morton, Investors Offshore.com

13 April 2007

The National Association of Securities Dealers (NASD) on Tuesday issued a warning with regard to the increasing use of margin (or debt) to purchase securities.

Earlier this week, NASD issued an updated Investor Alert warning investors about the risks associated with trading on margin.

Since the release of a previous Alert on this topic in 2003, the amount of debt taken on by investors to buy securities has reached a record high, scaling $321.2 billion in February 2007.

"We are concerned too many investors are unaware they could suffer substantial financial losses by using debt to purchase securities," explained Mary L. Schapiro NASD Chairman and CEO. She added:

"By updating our Alert on this topic, we hope to remind investors not to underestimate the risks involved."

The alert is entitled 'Investing with Borrowed Funds: No "Margin" for Error', and it explains that investors who cannot satisfy margin calls can have large portions of their accounts liquidated under the market conditions at the time, favorable or unfavorable. That liquidation can result in substantial losses.

According to the NASD, risks associated with opening a margin account can include:

  • Firms can force the sale of securities in accounts to meet a margin call;
  • Firms can sell securities without contacting the account holder;
  • Account holders are not entitled to choose which securities or other assets can be sold;
  • Firms can increase margin requirements at any time and are not required to provide advance 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.

The securities industry body urged account holders to ask whether they will automatically be placed into a margin account and, if so, what the rate of interest will be, and what circumstances would trigger a margin loan.

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