I opened a stock trading account with TD AMERITRADE back in 2002 with just $1500. And my initial experiences with them (it was just Ameritrade back then) were largely positive. They gave me 6 “free trades” as an account opening bonus, and I made some good stock picks and more than doubled my money in less than two years.
Their customer service department was and still is very responsive and professional, and will always get back in touch with you by email or telephone within 24 hours of your query. And TD AMERITADE is a full-service brokerage, that is, they offer a full range of stock and bond trading alternatives, as well as other financial services and products.
However, back in 2006 I made the mistake of upgrading to a margin account. A margin account enables you to have more “leverage” and thus own more stock for the same amount of money. Which sounds great, until you read the fine print.
The amount of “margin” that a brokerage will offer you depends on the particular stock. If you are buying a blue chip stock like GE or IBM you might be offered up to 70% margin (meaning you only have to put up 30 cents for every dollar if stock you buy), but on smaller, riskier equities, the margin percentage might be as little as 20-25%. And in most cases margin is not offered on stocks trading under $5.
However, the fine print of your margin contract says they can change the margin requirements on a stock at any time. I read the contract but the potential consequences did not soak into me at the time.
I had almost all of my funds invested in a stock called Elan Pharmaceuticals back in 2007, and when ELN got some very bad news about a side effect of a drug they had on the market, the stock lost over 60% of its value overnight. And here comes the kicker, TD AMERITRADE decided that Elan was now a riskier stock and they dropped the margin from 50% to 25%, meaning that I had to come up with a couple of thousand dollars within three days or face automatic liquidation of my Elan position. I had just gotten the dreaded “margin call”.
I only had a few hundred dollars in extra cash at that point so I ended up with the worst case scenario…losing OVER 90% of my position to automatic liquidation. What had been a $5000 account just days ago was now barely worth over $500 even though the stock was only down by around 50%!
You see, when the stock is already down a large percentage from what you paid and your brokerage changes the margin requirement, you have to sell off a great deal more of the stock to meet the new margin requirement, as the amount you “owe” on margin is based on the original purchase price.
I complained bitterly, but was informed that this was all legal and pro forma, and there no exceptions. However, after doing a good bit of research and chatting on stock message boards I learned this was not the case, and that many wealthier (or well-connected) investors could and did negotiate their margin calls, getting extra time or even getting the margin requirements changed based on their “special financial circumstances”.
I even wrote to the SEC to complain and received a form letter in return, The lesson I learned (and was corroborated by MANY others on the stock message boards) is that Wall Street and stock brokerages like TD AMERITRADE are part of a legal “organized scam” to take the money of unsuspecting retail investors at every opportunity they get, and that almost nothing is really what it seems like on Wall Street or in the financial markets in general.