When you purchase qualified securities, you may pay for the securities in full or you may borrow part of the purchase price from Janney. If you choose to borrow funds, you must open a margin account with Janney. The securities purchased, as
well as other securities in your margin account, are Janney's collateral for the loan to you. If the securities in your account decline in value, so does the value of the collateral supporting your loan, and, as a result, Janney can take action,
such as issue a margin call and/or sell securities or other assets in any of your accounts held at Janney in order to maintain the required equity in the account.
It is important that you fully understand the risks involved in trading securities on margin. These risks include the following:
You can lose more funds than you deposit in the margin account.
A decline in the value of securities that are purchased on margin may require you to provide additional funds to Janney to avoid the forced sale of those securities or other securities or assets in your account(s).
Janney can force the sale of securities or other assets in your account(s).
If the equity in your account falls below the maintenance margin requirements or Janney's higher "house" requirements, the firm can sell the securities or other assets in any of your accounts held at Janney to cover the margin deficiency. You also
will be responsible for any shortfall in the account after such a sale.
Janney can sell your securities or other assets without contacting you.
Some investors mistakenly believe that a firm must contact them for a margin call to be valid and that the firm cannot liquidate securities or other assets in their accounts to meet the call unless the firm has contacted them first. This is not
the case. Janney will attempt to notify our clients of margin calls, but we are not required to do so. However, even if Janney has contacted a client and provided a specific date by which the client can meet a margin call, we can still
take necessary steps to protect our financial interests, including immediately selling the securities without notice to the client.
You are not entitled to choose which securities or other assets in your account(s) are liquidated or sold to meet a margin call.
Because the securities are collateral for the margin loan, Janney has the right to decide which security to sell in order to protect our interests.
Janney can increase "house" maintenance margin requirements at any time, and we are not required to provide you advance written notice.
These changes in firm policy often take effect immediately and may result in the issuance of a maintenance margin call. Your failure to satisfy the call may cause Janney to liquidate or sell securities in your account(s).
You are not entitled to an extension of time on a margin call.
While an extension of time to meet margin requirements may be available to clients under certain conditions, you do not have a right to the extension.
Janney is required to send clients with margin accounts the preceding information on an annual basis. We believe the following additional information will assist our clients in understanding the various aspects of margin borrowing, especially the
risks.
How does margin work?
When you use margin, you are employing leverage—using borrowed money in an attempt to increase your investment returns. However, leverage is a double-edged sword. When the price of a margined security declines, leverage will increase
the risk of loss.
Consider an example:
| | Using Cash Only | Using Margin |
Value of Purchase | $10,000 | $10,000 |
Investor's Cash Payment | $10,000 | $5,000 |
Margin Loan from Janney | 0 | $5,000 |
Assume Value Increase of $1,000 |
New Value | $11,000 | $11,000 |
Profit | $1,000 | $1,000 |
Cash Investment | $10,000 | $5,000 |
Return on Investment | 10% | 20% |
Assume Value Decrease of $1,000 |
New Value | $9,000 | $9,000 |
Loss | $1,000 | $1,000 |
Cash Investment | $10,000 | $5,000 |
Return on Investment | -10% | -20% |
The example shows that an investor who makes a cash purchase either loses or gains 10%, while the margined investor loses or gains 20%. For this reason, investors who employ margin usually have a more aggressive approach to investing with a willingness
to take larger risk. Investors who use margin will also be charged interest on the borrowed amount, as explained in the section titled "Margin Interest." Before choosing to invest using margin, you should consult your Janney Financial
Advisor to determine if the risk is appropriate for your investment objectives and tolerance for risk.
Initial Margin Requirements and Maintenance Requirement
The initial margin requirement is the percentage amount required as initial equity from the investor. Federal Reserve Board Regulation T establishes a minimum equity value for margin transactions. For most equity securities, which meet standards
as defined in the regulation, this requirement is 50%—the investor must have 50% of the security's value on deposit. Some securities, including many U.S. Treasury issues, have lower margin requirements.
When an investor borrows on margin, there is an ongoing minimum equity requirement called the maintenance requirement, usually 30%. In some cases, Janney may have a "house" requirement that is above 30%. For example, Janney has a maintenance
requirement of 75% on certain stocks and 100% on others (100% means these securities are not eligible for margin.) As another example, when a stock's price falls below $4 per share, Janney applies a 100% maintenance requirement (Please note:
to purchase an equity stock on margin, the price of the stock has to be above $5 per share).
If the value of the securities in a margin account falls so that the equity is below the maintenance requirement, a margin call will be issued requiring the client to deposit cash or securities into the margin account to bring the equity value up to the
required maintenance level. As noted earlier, Janney can change maintenance requirements at any time without prior notification.
Consider the table below showing a decline in value. The example assumes that the maintenance level on all securities in the account is 30%. When the value of the securities in the account falls below $7,000, the equity falls below 30% which
will trigger a margin call.
Impact of a Decrease in Value |
Account Value | $10,000 | $9,000 | $8,000 | $7,000 |
Margin Loan | $5,000 | $5,000 | $5,000 | $5,000 |
Equity (value minus loan) | $5,000 | $4,000 | $3,000 | $2,000 |
Equity percent (equity divided by value) | 50% | 44% | 38% | 29% |
When equity falls below the maintenance requirement, and a margin call is issued, Janney will try to contact the client. As noted in the required disclosures listed in the beginning of this document however, Janney can sell securities to meet a
margin call at any time, without notice. Janney can also change the maintenance requirements at any time without prior notification.
Margin Interest
Janney will charge interest to margin accounts based on the Janney Base Rate. The Janney Base Rate is an internally calculated rate established by Janney and changes from time to time based on Janney’s cost of funds as well as Janney’s assessment
of the rates charged in the financial markets. To determine your margin account’s interest rate, we will use the schedule below. The interest rate you will be charged for borrowing on margin will increase or decrease as the Janney Base Rate
increases or decreases. The Janney Base Rate is published below and is subject to change without prior notice to you. We encourage you to check our site frequently to be sure you are aware of the current Base Rate at all times.
The following schedule of the annual interest rate that will be charged on all margin debit balances is as of July 1, 2013:
If the Debit Balance Is: | Percentage of Interest Charged: |
Less than $25,000 | Janney Base Rate Plus 5.875% |
Between $25,000 & $49,999 | Janney Base Rate Plus 5.25% |
Between $50,000 & $99,999 | Janney Base Rate Plus 4.75% |
Between $100,000 & $249,999 | Janney Base Rate Plus 4.25% |
Between $250,000 & $499,999 | Janney Base Rate Plus 4.00% |
Between $500,000 & $999,999 | Janney Base Rate Plus 3.75% |
Between $1,000,000 & Up | Janney Base Rate Plus 3.50% |
The Janney Base Rate as of July 27, 2023 is 8.50%
For example, a margin client with a debit balance or margin loan of $300,000 will pay an interest rate of 12.50%. As the Janney Base Rate changes, so does the rate charged to the margin borrower.
While investors who use margin may increase the profit potential of investing, there are significant risks to margin borrowing which should be understood before embarking on a margin strategy. Your Janney Financial Advisor can provide you with further
information and help guide you in making good investment decisions. For more information on margin borrowing, there are several websites with valuable information including:
Securities and Exchange Commission - www.sec.gov
The Financial Industry Regulatory Authority - www.finra.org
As always, we welcome any comments or questions. Contact your Janney Financial Advisor or contact us via email or mail, as
follows: [email protected]
Disclosure Information
Janney Montgomery Scott LLC
1717 Arch Street
Philadelphia, PA 19103
Depending on your financial needs and personal preferences, you may opt to engage in a brokerage relationship, an advisory relationship or a combination of both. Each time you open an account, we will make recommendations on which type of relationship is in your best interest based on the information you provide when you complete or update your client profile.
When you engage in an advisory relationship, you will pay an asset-based fee which encompasses, among other things, a defined investment strategy, ongoing monitoring, and performance reporting. Your Financial Advisor will serve in a fiduciary capacity for your advisory accounts.