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JOB MARKET ADVICE FOR MY STUDENTS University of New Orleans Tulane University Securities Business & Brokerage Firms Economic Analysis, Industry Analysis, Company Analysis How to set personal and professional goals.
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MARGIN ACCOUNTS
Here is some language that a brokerage firm may use to warm a potential investor about applying for and using a margin account:
When you purchase securities, you may pay for the securities in full or you may borrow part of the purchase from your brokerage firm. If you choose to borrow funds you’re your firm, you will open a margin account with Fidelity. The securities in your account are the brokerage firm’s collateral for the loan to you. If the securities in your account decline in value, so does the value of the collateral supporting your loan, and, as a result, the brokerage firm can take action, such as issue a margin call and/or sell securities or other assets in any of your accounts held with the firm in order to maintain the required equity in the account.
It is important that you fully understand the risks involved in trading securities on margin. These risks involved in trading securities on margin. These risks include:
You can lose more funds than you deposit in the margin account. A decline in the value of securities you purchased on margin may require you to provide additional funds or margin-eligible securities to the brokerage firm to avoid the forced sale of any securities or assets.
The brokerage can force the sale of securities or other assets in your account(s). If the equity in your account falls below the maintenance margin requirements or the brokerage firm’s higher “house” requirements, the brokerage firm can sell the securities or other assets in any of your accounts held at the brokerage firm to cover the margin deficiency. You also will be responsible for the shortfall in the account after such a sale, possibility including the brokerage firm’s costs related to collecting the shortfall.
The brokerage firm can sell your securities or other assets without contacting you. Some investors mistakenly believe that a firm must contact them for a margin call to be valid, and that the firm cannot liquidate the securities or other assets in their accounts to meet the call unless the firm has contacted them first. This is not the case. Most firms will attempt to notify their customers of margin calls, but they are not required to do so. In addition, even if a firm has contacted a customer and provided a specific date by which the customer can meet a margin call, the firm can still take necessary steps to protect its financial interests prior to that date, including immediately selling the securities without notice to the customer.
You are not entitled to choose which securities or other assets in your account are liquidated or sold to meet a margin call. Because the securities and any other assets in your account are collateral for the margin loan, the brokerage firm has the right to decide which assets to sell in order to protect its interests.
The brokerage firm can increase its “house” maintenance margin requirements at and is not required to provide you advance notice. These changes in firm policy often take effect immediately and may result in the issuance of a maintenance margin call. Your failure to satisfy the call may cause the brokerage firm to liquidate or sell securities or any other assets in your account.
You are not entitled to an extension of time on a margin call. While an extension of time to meet margin requirements may be available to customers under certain conditions, a customer does not have a right to the extension.
Short selling is a margin account transaction and entails the same risks as described above. The brokerage firm can buy in your account securities to cover a short position without contacting you, and may use all or any portion of the assets in your account to make such a purchase. If the assets in your account are not sufficient to cover the cost of such a purchase, you will be responsible for any shortfall, possibly including the brokerage firm’s costs in collecting the shortfall.
The brokerage firm can loan securities held in your margin account which collateralizes your margin borrowing. In connection with the extension or maintenance of margin credit, the brokerage firm may loan securities in your margin account to itself or to others. As a result of these loans, you may not be entitled to receive certain benefits of a securities owner, such as the ability to exercise voting rights and/or receive interest, dividends, and/or other distributions with respect to the securities lent. While a security in your account is lent, you may only be allocated and receive substitute payments in lieu of such interest, dividends, and/or other distributions. Substitute payments may not be afforded the same tax treatment as actual interest, dividends, and/or other distributions, and you may incur additional tax liability for substitute payments that you receive. The brokerage firm may allocate substitute payments in any manner permitted by law, rule, or regulation, including, but not limited to, by means of a lottery allocation method. You are not entitled to any compensation in connection with securities lent from your account or for additional taxes you may be required to pay as a result of any tax treatment differential between substitute payments and actual interest, dividends, and/or other distributions.
In addition to market volatility, the use of bank card, checkwriting, and similar features with your margin account may increase the risk of a margin call. |
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