What Are Marginable and Non-Marginable Securities?

Investors sometimes use borrowed money to amplify potential returns, a practice known as margin trading. This allows individuals to purchase more securities than with cash alone. Not all securities are eligible for leveraged buying, creating a distinction between marginable and non-marginable securities. Understanding these categories is important for investors considering margin use.

Basics of Margin Trading

Margin trading involves borrowing funds from a brokerage firm to buy securities. This increases an investor’s purchasing power and can potentially enhance returns, as gains on purchased securities are magnified.

A margin account allows for leveraged transactions. Investors pay a percentage of the purchase price, with the brokerage lending the rest. Federal Reserve Board’s Regulation T sets the initial margin requirement at 50% for most securities, meaning investors must provide at least half the purchase price.

Interest accrues daily on the borrowed amount, based on a variable rate set by the brokerage. The securities purchased on margin serve as collateral for the loan. The brokerage can sell these assets if the account’s equity falls below certain levels.

Characteristics of Marginable Securities

Securities are marginable when they meet criteria indicating market stability, liquidity, and transparency. A primary characteristic is being listed on a major national stock exchange, such as the New York Stock Exchange (NYSE) or Nasdaq. These exchanges enforce stringent listing requirements, providing regulatory oversight and market depth.

Marginable securities generally exhibit substantial market capitalization, indicating large company size and widespread investor interest. They also possess sufficient trading volume, ensuring robust liquidity. Relatively low volatility is another common trait, as excessive price swings pose increased risk to both the investor and the brokerage.

Common examples include established common stocks of well-known companies. Exchange-Traded Funds (ETFs) that track broad market indexes or diversified sectors are also frequently marginable. Certain highly liquid and investment-grade bonds may also be eligible for margin borrowing.

Characteristics of Non-Marginable Securities

Securities are non-marginable when they present higher risks or lack market characteristics necessary for reliable loan collateral. A significant factor is trading over-the-counter (OTC) or on “pink sheets” rather than major exchanges. These markets often have less stringent reporting and lower liquidity, making them less suitable for margin borrowing.

New issues, such as Initial Public Offerings (IPOs), are frequently non-marginable for an initial period, often 30 days or more, due to inherent price volatility and lack of established trading history. Securities with extremely low liquidity, meaning they are difficult to buy or sell without significantly impacting their price, are also non-marginable. High volatility, leading to rapid and unpredictable price movements, poses an elevated risk to the brokerage.

Highly speculative securities, like penny stocks, fall into the non-marginable category. Certain options contracts, particularly those with short expiration periods or complex structures, may also be non-marginable. Unlisted securities and illiquid bonds further exemplify assets that cannot be purchased on margin due to limited market depth and higher risk profiles.

Practical Implications for Investors

The distinction between marginable and non-marginable securities significantly impacts an investor’s trading capabilities and account management. Non-marginable securities, despite being part of an investor’s portfolio, do not contribute to the “loan value” or “equity” available for margin borrowing. They cannot be used as collateral to initiate new margin trades or offset margin requirements for other positions.

When an investor holds both marginable and non-marginable securities in a margin account, only the marginable assets are considered when calculating the account’s maintenance margin. Maintenance margin is the minimum equity an investor must maintain, typically 25% of the total market value of marginable securities, although many brokerages impose higher “house requirements,” often 30% or more. If the account’s equity falls below this threshold, a margin call is triggered.

A margin call requires the investor to deposit additional funds or sell securities to bring the account equity back to the required level, typically within a few business days. Failure to meet a margin call can result in the brokerage firm liquidating securities without prior notice to cover the deficit. This forced liquidation can occur at unfavorable prices, potentially leading to significant losses. Interest charges on borrowed funds continuously accrue, reducing an investor’s net returns and increasing the cost of holding positions on margin.