Margin Accounts: A Double-Edged Sword

by John Gannon

Every month, investors borrow considerable sums to purchase securities “on margin.” In January of 2005, the amount of debt taken on to buy securities exceeded $200 billion.

The use of leverage magnifies an investor’s returns on the upside, but also magnifies losses on the downside.

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NASD has written this article because we are concerned that many investors underestimate the risks of trading on margin and misunderstand the operation and reason for margin calls. Investors who cannot satisfy margin calls can have large portions of their accounts liquidated under unfavorable market conditions. These liquidations can create substantial losses for investors.

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