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NEWSLETTERS & ALERTS
Investments - Unsuitable
Farmer Left ‘Out in the Cold’ by Excessive Margin Trading
[Photo: Farmer / Harvest Public Media]
by Howard Haykin
Between October 2016 and December 2017, a broker with First Standard Financial Company essentially took control of the farmer’s brokerage account and engaged in excessive and unsuitable trading – solely to enrich the broker and his firm. While doing all the trading (to which the farmer agreed), the broker actively bought and sold stock, executing a significant number of trades using margin. This level of trading ramped up the account’s annual turnover rate to 34 and the annualized cost-to-equity ratio to 113%.
By the time the dust had settled, the farmer had incurred more than $77,000 in losses and paid out $18,000 in fees and commissions. By comparison, over that same 15-month period, the Standard & Poor’s (S&P) 500 Stock Index rose 26%.
Buying on Margin … is borrowing money from a broker in order to purchase stock. You can think of it as a loan from your brokerage. Margin trading allows you to buy more stock than you'd be able to normally – which, in turn, increases the risk of greater losses if an investor’s stocks fall in price.
Turnover Rate … typically ranges between 0 and 1, but can be higher in actively traded accounts – like 34, in this case. The rate is computed by taking acquisitions or dispositions in an account, whichever is greater, and dividing it by average monthly assets in that account.
Cost-To-Equity Ratio … in excess of 20% generally indicates excessive trading – like 113%, in this case. The ratio is obtained by dividing total expenses by average monthly equity.
[For further details, click on … FINRA Case #2017052466302.]