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U.S. Securities and Exchange Commission

SEC Introduces Margin Calculator

FOR IMMEDIATE RELEASE

2001-38

Web-Based Tool Will Help Investors Quantify Margin Investing Costs and Risks

Washington, D.C., April 19, 2001 – Securities and Exchange Commission Acting Chairman Laura S. Unger today unveiled a new Internet-based tool to help individual investors estimate their likelihood-based on their actual holdings-of getting a dreaded margin call in the next thirty days, three months, or year.

The SEC's Margin Calculator, available for free on the Commission's website www.sec.gov, also explains how margin accounts work-including the fact that margin account agreements may give brokers the right to sell an investor's shares without warning to cover a margin call.

"While investing on margin increases an investor's purchasing power and multiplies gains when stock prices rise, it will also magnify losses if the price falls," Chairman Unger said. "The Margin Calculator will help investors better balance their investment objectives with their tolerance for risk."

The Margin Calculator is actually three calculators in one:

  • The Leverage Effect calculator compares a margin investor's potential gain or loss from a change in a stock's price depending on the amount of money borrowed.
  • The Margin Cost calculator computes the dollar amount of interest that an investor will pay over the life of a margin loan.
  • The Risk of a Margin Call calculator estimates the likelihood, based on up-to-date historical data, that an investor will receive a margin call in coming months. The greater a portfolio's volatility, the greater the risk.

As the use of margin has risen in recent years, so has the number of investor complaints to the SEC about margin calls. In 2000, margin call complaints to the SEC more than doubled, and they are the Commission's sixth-leading investor complaint this year.

Many of the investors complained that they suffered serious financial losses-sometimes their entire life's savings-because their securities were sold to cover a margin call.

Margin calls occur when the equity in an investor's margin account drops below a certain percentage-typically 35-40 percent-of the account's value. Equity is determined by subtracting the amount of money borrowed from the value of the securities in the account.

If investors are unable to cover a margin call by depositing more cash or securities into their account, the broker will sell the investor's securities to bring the account back into balance. Even if a firm offers to give an investor time to increase his or her equity, most margin account agreements reserve the firm's right to sell the investor's securities without waiting for the investor to cover the call.

[The SEC's Margin Calculator is no longer available.]

For more information about margin, visit www.sec.gov/investor/pubs/margin.htm.

http://www.sec.gov/news/headlines/margincalc.htm

Modified: 10/23/2006