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. How does a broker decide which customers are eligible to open a margin account?

    Learn how brokers have the sole discretion to determine which customers can open margin accounts, and understand the rules ... Read Answer >>
  5. Can you short sell stocks that are trading below $5? My broker says that I can't.

    Short selling can be very risky for both the investor and the broker. Brokers will often tell investors that only stocks ... Read Answer >>
  6. Why choosing the right investment advisor is crucial for your portfolio's health

    Absolutely! Just as finding a good mechanic will help keep your car running smoothly, finding a good broker or financial ... Read Answer >>
Related Articles
  1. Brokers

    Is Your Broker Acting In Your Best Interest?

    Learn the clues you'll need to determine whether you've chosen a reputable professional.
  2. Brokers

    Evaluating Your Stock Broker

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

    Picking Your First Broker

    If you're a rookie investor, your first big investment decision should be an informed one.
  4. Forex

    Brokers

    The foreign exchange, or forex, market can be a risky place to trade, get a better understanding in this walkthrough.
  5. Active Trading Fundamentals

    Introduction to Margin Accounts

    Find out what your broker is doing with your securities when you invest on margin.
  6. 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.
  7. Investing Basics

    How To Choose The Right Online Trading Broker

    The online broker market is becoming more competitive, but differences exist in services that can help traders choose the broker that’s right for them.
  8. Brokers

    How Brokerage Fees Work

    What you need to know about fees when choosing between a full service and discount broker.
  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. Home & Auto

    10 Things Your Real Estate Broker Won't Tell You

    Whether you're selling a home or buying one, go in with eyes wide open when you're working with a broker.
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. Aged Fail

    A contract between two broker-dealers that has not been settled ...

You May Also Like

Hot Definitions
  1. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  2. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  6. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
Trading Center