A:

Your broker's actions are not legal unless he or she sold the securities under certain conditions. Let's look at the two common instances in which your broker's actions are legal:

First, if you have some type of discretionary account for which you have signed documents giving the broker permission to buy and sell securities for your portfolio, then your broker may sell from your account. However, the trade the broker made must be within the guidelines set out in the account contract, which describes your risk tolerance and your investment goals. If you believe the broker's actions did not satisfy the guidelines set out in your contract, the first thing you should do is send a letter discussing the facts of the situation to the broker's firm and manager. It is possible that the broker and the firm were unaware of the situation and will deal with it accordingly and internally once it's brought to their attention. The letter also provides you with written proof of your claim. Second, contact the SEC and file a complaint for review. If the firm and broker have not dealt with the matter in a satisfactory manner or have not explained the situation, the SEC can investigate further.

Second, if you have a margin account and your equity level has fallen below the firm's maintenance margin requirements, the brokerage has every right to sell your securities without contacting you or obtaining your permission. Most often, firms are not required to give you a margin call, so if they give one, they are doing so as a customer service gesture. The actions you can expect from your brokerage are spelled out in the margin account agreement that you signed upon opening the account. To ensure it receives the money you borrowed, the brokerage will sell your account's securities regardless of whether you lose money on the trades, but the broker may not necessarily use a strict method when picking the stocks to sell out of your account. Instead, the stocks that are sold to cover the entire deficit in the equity level may, for example, be picked in alphabetical order. To top it all off, upon selling your securities, your broker may even charge you a full commission for the transaction.

To learn more, read Is Your Broker Acting In Your Best Interest?

RELATED FAQS
  1. Why is purchasing stocks on margin considered more risky than traditional investing?

    Learn why purchasing stocks on margin is riskier than traditional investing, although it can be more profitable when it is ... Read Answer >>
  2. I'm new to this. Can I sell or buy stock by myself?

    In order to buy stocks, you need the assistance of a stock broker since you cannot just phone up a company and ask to buy ... Read Answer >>
  3. There are so many stockbrokers out there. How do I go about choosing the best one ...

    If you decide that you have the knowledge and experience to take on stock investing, or if you feel you would like to give ... Read Answer >>
  4. What does "in street name" mean, and why are securities held this way?

    In almost every instance when you buy or sell securities with a broker, your name is not actually on the stock or bond certificate. ... Read Answer >>
  5. Why do brokers ask for personal information before they make any trades?

    According to the Securities and Exchange Commission (SEC), there are three main reasons why a broker will ask for personal ... Read Answer >>
  6. Does a broker always have to buy a stock if I want to sell it?

    There are certain times when a broker must purchase the stock that you are selling. For example, if the broker is a market ... Read Answer >>
Related Articles
  1. Brokers

    Evaluating Your Stock Broker

    Make sure you're getting the best service by staying informed and involved.
  2. Investing Basics

    Picking Your First Broker

    If you're a rookie investor, your first big investment decision should be an informed one.
  3. Active Trading Fundamentals

    Introduction to Margin Accounts

    Find out what your broker is doing with your securities when you invest on margin.
  4. Forex Education

    Is Your Forex Broker A Scam?

    While the forex market is slowly becoming more regulated, there are many unscrupulous brokers who should not be in business.
  5. Bonds & Fixed Income

    Interpreting Your Broker's Reports

    Broker's reports can be confusing, but they don't have to be. Find out what information you need from your broker.
  6. Options & Futures

    Brokers and Online Trading: Conclusion

    One of the most important investment decisions you will make has nothing to do with which stock, bond or mutual fund you buy. We're talking about selecting a broker. Hopefully the information ...
  7. Investing Basics

    5 Misconceptions About Discount Brokers

    While discount brokers are the perfect choice for some investors, their business model could be detrimental to others.
  8. Options & Futures

    Brokers and Online Trading

    How do you find the right broker for your investment needs? Start by reading our broker tutorial.
  9. Active Trading Fundamentals

    Short Selling: What Is Short Selling?

    Investopedia Explains: The fundamentals of short selling and the difference between going long or short on an investment.
  10. Options & Futures

    10 Tips For Choosing An Online Broker

    This important investment decision happens before you pick your first stock. Find out how to get it right.
RELATED TERMS
  1. Carrying Broker

    A commodities or securities broker who provides back office functions ...
  2. Give Up

    A procedure in securities or commodities trading where the executing ...
  3. Forex Broker

    Firms that provide currency traders with access to a trading ...
  4. Each Way

    A slang phrase used when a broker earns commissions from both ...
  5. Two Dollar Broker

    A floor broker who executes orders for other brokers who cannot ...
  6. Margin Call

    A broker's demand on an investor using margin to deposit additional ...
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center