What Are Marginable Securities?
Understand the assets eligible for margin trading, the key factors that define their collateral value, and how brokerage rules impact this.
Marginable securities represent a specialized category of investments that can serve as collateral for a loan provided by a brokerage firm. This arrangement enables investors to borrow funds against the value of these assets, increasing their purchasing power within their brokerage account. A margin loan allows an investor to acquire additional securities beyond the cash available. However, not all securities qualify, as specific characteristics determine their eligibility.
Understanding Marginable Securities
A security’s status as “marginable” signifies its eligibility to be purchased using borrowed funds or to serve as collateral for a margin loan. This concept is influenced by factors reflecting the security’s risk profile and market characteristics. High liquidity is a primary determinant, meaning the asset can be readily bought or sold without significantly impacting its price. Brokerage firms prefer liquid assets as collateral because they can be quickly converted to cash if a margin loan needs to be satisfied.
Securities listed on major exchanges, such as the New York Stock Exchange (NYSE) or Nasdaq, are generally more likely to be marginable due to robust regulatory oversight, transparency, and standardized trading practices. Conversely, securities with extreme price volatility often face stricter margin requirements or may not be marginable. Companies with larger market capitalization and established operational histories typically have more marginable stock. The Federal Reserve Board establishes baseline initial margin requirements through regulations like Regulation T, which sets the minimum percentage of a security’s purchase price an investor must pay with their own funds.
Commonly Marginable Asset Classes
Many actively traded stocks listed on major exchanges, particularly those of well-established companies with substantial trading volumes, generally qualify as marginable securities. Exchange-Traded Funds (ETFs) are another common asset class often deemed marginable, especially those tracking broad market indices or highly liquid sectors. Their diversified nature and frequent trading activity align with marginability criteria.
Certain types of bonds, especially highly liquid government bonds like U.S. Treasuries and some actively traded corporate bonds, can also be marginable. The stability and predictability of their income streams contribute to their eligibility. While not all mutual funds are marginable, some with a long operating history and high liquidity may qualify, often after a specific holding period, which can range from 30 to 90 days. Other potentially marginable assets include certain options strategies, such as covered calls, and highly liquid preferred stocks, though their marginability can vary significantly.
Securities Not Typically Marginable
Certain types of securities are generally excluded from marginability due to their inherent risks, lack of transparency, or limited market access. Penny stocks, which trade at very low prices, and securities on the OTC Bulletin Board (OTCBB) or Pink Sheets, are typically non-marginable. These investments often exhibit low liquidity, extreme price volatility, and a lack of readily available financial information, making them unsuitable as collateral for brokerage loans.
New issues, including securities from Initial Public Offerings (IPOs), are usually not marginable for a specific period after their initial offering, often around 30 days. This restriction accounts for initial price volatility and the absence of a significant trading history for these newly introduced assets. While some options strategies are marginable, certain complex or “naked” options positions often have very high margin requirements or are entirely non-marginable due to their unlimited risk potential. Restricted securities, such as those acquired through private placements or subject to transfer restrictions under rules like SEC Rule 144, are generally not marginable because they cannot be freely traded in the open market.
Brokerage Firm Policies and Margin Requirements
While the Federal Reserve sets baseline initial margin requirements, such as the typical 50% for most common stocks, individual brokerage firms establish higher, more conservative requirements. These “house rules” are based on the firm’s own risk assessments and can vary significantly. A brokerage firm might, for instance, require a 60% initial margin for a particular stock, even if Regulation T permits 50%.
Each brokerage firm maintains its own specific list of marginable securities and may apply different “haircuts” to the value of assets. A haircut refers to the percentage reduction applied to a security’s market value when calculating its collateral value for margin purposes. This means a security valued at $100 might only be recognized as $80 for collateral purposes after a haircut. Firms also establish maintenance margin requirements, representing the minimum equity percentage an investor must maintain in their margin account relative to the total value of the securities held. If the equity falls below this percentage, typically ranging from 25% to 35%, a margin call may be triggered. A security’s marginability can change over time due to shifts in market conditions, company performance, or updates to a brokerage firm’s internal policies. The definitive source for understanding a specific security’s marginability and associated requirements is the investor’s brokerage firm agreement and its published policies.