Subscribe to our mailing list

* indicates required







We seek to provide information, insights and direction that may enable the Financial Community to effectively and efficiently operate in a regulatory risk-free environment by curating content from all over the web.


Stay Informed with the latest fanancialish news.




Investments - Unsuitable

Farmer Left ‘Out in the Cold’ by Excessive Margin Trading

April 7, 2020

[Photo: Farmer / Harvest Public Media]


by Howard Haykin



Now, just a cotton-picking minute!  What business does this 70-year old farmer have with trading on margin in his brokerage account?  NONE – and adding insult to injury, while the stock market was up BIG, his brokerage account suffered nearly $100,000 in losses and expenses.



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.



There’s already too much borrowing in most people’s lives – home and residence mortgages, car loans, and everyday credit card purchases. So why would an average person want to borrow on stock market investments. THEY SHOULDN'T.  So, if asked to open a Margin Account, refuse to sign on the dotted line (of the Margin Agreement). Then walk away and find another (more reputable) broker.



[For further details, click on … FINRA Case #2017052466302.]