What Does Marginable Mean for Securities?

“Marginable” refers to a security that can be bought using borrowed funds from a brokerage firm. This practice, known as buying on margin, involves an investor using a loan from their broker to purchase financial instruments. The securities bought, along with any cash in the account, serve as collateral for this borrowed money. This arrangement allows investors to increase their purchasing power beyond their available cash, acting as a credit facility from the brokerage.

Understanding Marginable Securities

A security is “marginable” when it meets specific criteria set by regulatory bodies and brokerage firms. These criteria manage risk for both the investor and the broker. Marginable securities are characterized by their liquidity, stable trading history, and listing on major exchanges.

The Federal Reserve Board, through Regulations T and U, provides overarching guidelines. Beyond these federal rules, the Financial Industry Regulatory Authority (FINRA) and individual brokerage firms establish their own, often more stringent, requirements. This layered approach ensures only securities meeting certain risk profiles are eligible for margin trading.

Marginable securities are typically traded on a major U.S. exchange, possess high liquidity, and maintain a price per share above a certain threshold, often around $5. Securities with robust market capitalization are also favored as marginable assets. These factors indicate a security’s stability and its ability to be easily bought or sold without significant price impact.

Many widely traded securities are marginable, such as most stocks listed on national exchanges, certain exchange-traded funds (ETFs), and some bonds. These instruments are considered more stable and liquid, making them suitable collateral for margin loans and mitigating risk for brokerage firms.

Conversely, certain types of securities are generally not marginable due to their higher inherent risk or lack of liquidity. These include:

• Penny stocks (typically defined as stocks trading below $5 per share).
• Securities traded over-the-counter (OTC).
• Initial public offerings (IPOs) for a period after their market debut due to volatility.
• Certain mutual funds, which may have specific holding periods.
• Annuities and other less liquid or complex financial products.

These restrictions protect investors from excessive risk and brokerages from potential losses if collateral values decline rapidly.

How Margin Accounts Operate

Establishing a margin account is the initial step for an investor to engage in margin trading. Unlike a standard cash account, a margin account allows borrowing against securities held within it. This account provides access to a credit facility where the brokerage acts as the lender and the investor as the borrower.

Upon opening a margin account, an investor can borrow funds from the brokerage to purchase additional securities. Securities already held, along with any cash deposits, serve as collateral. This means the brokerage has a claim on these assets if the investor fails to meet obligations. The collateral’s value determines the amount of margin available.

Interest is charged on borrowed funds, similar to any other loan. This interest accrues daily and is charged against the account monthly. Interest rates can fluctuate based on market conditions and the amount borrowed, and brokerages may adjust these rates without prior notice.

Securities purchased on margin are held in the margin account and act as ongoing security for the loan. If their value declines, the collateral supporting the loan also decreases. This arrangement allows investors to leverage positions, potentially amplifying returns during favorable market movements, but also magnifies potential losses if the market moves unfavorably.

Brokerage firms continuously monitor the value of securities held as collateral. They can adjust the percentage of a security’s value allowed for further advances. This oversight helps the brokerage manage credit risk and ensures the investor maintains sufficient equity to cover borrowed funds.

Key Margin Requirements

Understanding the financial thresholds and rules associated with margin accounts is essential. These requirements protect both the investor and the brokerage from excessive risk. Two fundamental concepts govern margin accounts: initial margin and maintenance margin.

Initial margin refers to the percentage of the purchase price an investor must pay upfront with their own funds when buying securities on margin. The Federal Reserve, through Regulation T, mandates the initial margin requirement is 50% for most equity securities. This means an investor must deposit at least half of the purchase price, borrowing the rest from the brokerage. Brokerage firms often set their own initial margin requirements higher than the Regulation T minimum, sometimes requiring up to 70% or more.

After the initial purchase, investors must adhere to maintenance margin requirements. This is the minimum equity, expressed as a percentage of the total market value of securities, that an investor must maintain in their margin account. FINRA rules set a minimum maintenance margin requirement of 25% of the total market value. However, individual brokerage firms often establish higher “house” maintenance requirements, frequently ranging from 30% to 40%.

The purpose of maintenance margin is to ensure sufficient collateral to cover the loan if security values decline. Equity in an account is calculated as the market value of securities minus the margin loan. If account equity falls below the maintenance margin requirement, a “margin call” is triggered.

A margin call is a demand from the brokerage firm for the investor to deposit additional cash or marginable securities to bring equity back to the required level. Brokerages issue margin calls when the account’s equity falls below their specified house maintenance requirement. Investors usually have a limited timeframe, often a few days, to satisfy a margin call.

An investor can satisfy a margin call by:

• Depositing additional cash into the margin account.
• Depositing additional marginable securities into the account.
• Selling some of the existing securities in the margin account to reduce the outstanding loan balance.

If an investor fails to meet a margin call within the specified period, the brokerage has the right to liquidate (sell) securities in the account without prior notification. This forced liquidation can occur regardless of the investor’s wishes and may result in significant losses, even exceeding the initial investment.