Margin Position Sellouts
Feb. 14, 2012
Margin accounts allow brokerage customers to buy securities with money borrowed from the brokerage firm. If the value of the securities in the margin account falls below a certain level, the firm generally will ask the customer to deposit more cash or securities into the account. When customers are unable to meet a margin call, the brokerage firm will sell securities in the account to raise enough money to bring the account balance in line with the firm’s “maintenance” requirement.
Margin position sellouts can trigger capital gains taxes for investors and are one of risks of trading through a margin account. Investors can avoid this risk by maintaining a “cushion” of cash or securities in the margin account or by trading only through cash accounts, which do not permit buying on margin.
Brokers may not be required to make a margin call or inform customers when their account has fallen below the firm's maintenance requirement. Brokers may have the right to sell securities in a customer’s margin account at any time without consulting the customer first. Under most margin agreements, even if the firm offers to give customers time to increase the equity in an account, it can sell their securities without waiting for the customer to meet the margin call.
A broad market decline or a drop in the price of individual securities in a margin account can result in margin position sellouts. While the market or individual stocks may recover quickly, the brokerage firm has limits on its own borrowing and will not delay margin position sellouts in the hope that the market or the shares will recover soon.
To learn how margin trading works, the upsides and downsides, and the risks involved, read Margin: Borrowing Money To Pay for Stocks.