An account with a large percentage of investments in a single asset class may be considered concentrated. For example, while a diversified account may contain a strategic mix of
Concentrated accounts carry a high level of risk when borrowing on margin. For this reason, Scottrade may raise the margin equity requirement on accounts that are considered to be concentrated. Scottrade defines a concentrated margin account as one that contains one or two equity positions that make up the majority of the account's market value.
Just as Scottrade's regular margin requirements are on a graduated scale depending on the price of the stock, margin increases for concentrated accounts also depend upon the securities and amount of leverage in the account. Stocks additional requirement (deviation) goes from 10-70%. Account level additional requirement (deviation) is 10-20% depending on the debit balance and stock in the account.
To help avoid incurring increased margin requirements in your account, you may consider:
- Diversifying the holdings in your account
- Reducing the amount you are borrowing on margin
- Hedging your highly concentrated positions. One hedging strategy that some investors use in this situation is purchasing
protective puts. However, options trading carries significant risks and is not appropriate for all investors.
Margin trading involves interest charges and risks, including the potential to lose more than deposited or the need to deposit additional collateral in a falling market. Scottrade's margin agreement is available on our Web site and at our branch offices and contains the Margin Disclosure Statement and information on our lending policies, interest charges, and the risks associated with margin accounts.
Options involve risk and are not suitable for all investors. Detailed information on our policies and the risks associated with options can be found in the Scottrade Options Application and Agreement, Brokerage Account Agreement, and by downloading the Characteristics and Risks of Standardized Options and Supplements (PDF) from The Options Clearing Corporation, or by requesting a copy from your local branch office. Market volatility, volume, and system availability may impact account access and trade execution. Supporting documentation for any claims will be supplied upon request.
Keep in mind that while diversification may help spread risk it does not assure a profit, or protect against loss, in a down market.