Broker-Dealers seeing Renewed Interest in Customer Loans due to Market Rebound and Low Interest Rates
According to news reports this week, financial organizations are seeing an upward trend in margin loans with wealth management customers, despite significant losses that some may have suffered earlier this year.
An article in Reuters this week says that many investors are borrowing money from their brokerage firm to invest as a result of the current low interest rates and the market rebound from the March lows.
Debit balances in retail and institutional margin accounts were reportedly $562 billion in January, but dropped to $479 million in March, according to Reuters. Now the numbers have reportedly increased to $525 billion in April.
Although many investors suffered significant losses earlier this year as banks were liquidating collateral, some are still reportedly returning to margin loans.
Some banks are being more conservative on how much they’re willing to loan out for margin accounts and what types of securities they’ll lend against, bankers tell Reuters.
Risks of Margin Trading
- Your firm can force the sale of securities in your accounts to meet a margin call.
- Your firm can sell your securities without contacting you.
- You are not entitled to choose which securities or other assets in your accounts are sold.
- Your firm can increase its margin requirements at any time and is not required to provide you with advance notice.
- You are not entitled to an extension of time on a margin call.
- You can lose more money than you deposit in a margin account.
During unfavorable market conditions, investors who cannot satisfy margin calls can have large portions of their accounts liquidated. These liquidations can create substantial losses for investors.
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