At Frec, you are opening a margin account to give you the ability to borrow against the securities you own. A margin account has additional risks when compared to a standard cash brokerage account since you’re able to borrow against the securities in your account, a principle known as “leverage”.
Some of the additional risks associated with a margin account include the risk that you could lose more than you deposited into the account. This is because you’re borrowing a fixed amount against the securities in your account and those securities could lose value, resulting in that amount being greater than the value of the underlying positions.
You will be required to maintain a minimum amount of stock in your account to help prevent the value of underlying positions from dropping below the amount borrowed. When that value drops below a certain percentage relative to your borrowed amount, you could receive what is called a “margin call”. You can learn more about margin calls in our Margin Calls article. We will email you and provide an alert on our platform if you have a margin call. The email and alert will provide you details on how much securities you will need to sell or how much cash you need to deposit into your account to resolve the margin call.
You will typically have 3 business days (including the day the margin call is received) to sell the necessary amount of securities or deposit the necessary amount of cash into your account to resolve the margin call. If you do not take any action within those 3 business days and your margin call is still outstanding, Frec will select securities in your account and sell them to cover your margin call. We will try to keep you informed via email prior to selling any securities to cover your margin call. We also will not sell any securities in your account if you resolve the margin call yourself. Please keep in mind that fast moving markets may require Frec to sell securities to cover a margin call prior to the 3 business day timeline.
Frec and Frec’s clearing firm, Apex, can change the percentage amount you can borrow against your portfolio at any time without providing prior notice to you. These changes are typically infrequent and occur when the firm determines it needs to make an adjustment to lower potential risks of loss.
Finally, the IRS requires Frec to treat dividend payments on your loaned stock as a substitute payment in lieu of a dividend, which is taxed as ordinary income. Your voting rights may also be limited if the stock has been lent or pledged to others.