What Is a Marginable Security in a Margin Account?
Understand marginable securities: what they are, how they qualify, and their vital role as collateral in margin accounts.
A marginable security is an investment asset that can be purchased using funds borrowed from a brokerage firm, known as a margin loan. These securities also serve as collateral for that loan, enabling investors to increase their buying power beyond their cash on hand. Understanding what qualifies a security as marginable is essential for investors considering using a margin account, as not all investment products meet these specific requirements. This distinction influences how an investor can leverage their portfolio and manage associated risks.
Defining a Marginable Security
A marginable security is an asset an investor can acquire by borrowing money from a brokerage firm. It is deemed acceptable by regulators and firms as collateral for a loan. This allows an investor to buy more securities than with cash alone. The purchased securities, along with other eligible assets, act as security for the loan. While many common securities are marginable, some types of investments must be purchased entirely with cash.
Criteria for Marginability
Several factors determine whether a security is considered marginable, involving a combination of regulatory mandates and brokerage firm policies. The Federal Reserve Board’s Regulation T (Reg T) establishes the rules for the extension of credit by brokers and dealers for securities transactions. Under Reg T, investors can typically borrow up to 50% of the purchase price for eligible equity securities.
Beyond federal regulations, additional rules from organizations like the Financial Industry Regulatory Authority (FINRA) and individual brokerage firms play a significant role. FINRA Rule 4210 aligns with Regulation T but also sets maintenance margin requirements and can impose initial margin requirements on securities not specifically covered by Reg T, such as corporate bonds. Brokerage firms often implement their own internal policies that are stricter than these regulatory minimums to manage their risk exposure.
Security characteristics are carefully evaluated for margin eligibility. Securities generally must be listed on major national stock exchanges, such as the New York Stock Exchange or NASDAQ. Factors like liquidity, market capitalization, price stability, and consistent trading volume are considered, with many firms requiring a minimum share price, often around $5 or more. Newly issued securities, like those from an initial public offering (IPO), often have a waiting period before they become marginable, and these criteria exist to protect investors and brokerage firms by ensuring that collateral backing margin loans is stable, readily marketable, and easily valued.
Common Examples of Marginable and Non-Marginable Securities
Many widely traded investment products are considered marginable due to their liquidity and established market presence. This category often includes common stocks of well-established companies listed on major exchanges. Highly liquid exchange-traded funds (ETFs) are also frequently marginable, providing investors with diversified exposure that can be purchased with borrowed funds. Certain types of investment-grade corporate and government bonds may also qualify, offering another avenue for margin utilization. Even mutual funds can become marginable after a specific holding period, typically 30 days from purchase.
Conversely, numerous securities are designated as non-marginable due to their inherent risks or regulatory restrictions. Penny stocks, characterized by their low price, often below $5 per share, and high volatility, typically cannot be purchased on margin. Over-the-counter (OTC) securities, which trade outside formal exchanges and may lack transparency, are also commonly excluded. Newly issued securities, such as those from Initial Public Offerings (IPOs), are often non-marginable for an initial period due to their price unpredictability and lack of established trading history. Additionally, certain complex financial instruments like options and futures contracts have their own distinct margin rules and are not typically categorized as “marginable securities” in the context of general stock margin accounts; these exclusions aim to protect investors and brokers from the amplified losses that can occur when highly volatile, illiquid, or difficult-to-value assets are leveraged with borrowed money.
How Marginable Securities are Used in a Margin Account
Once a security is classified as marginable, it serves a function as collateral for the loan extended by the brokerage firm within a margin account. The value of these marginable securities held in the account directly influences the amount of money an investor can borrow. This effectively increases an investor’s purchasing power, allowing them to acquire more securities or engage in other financial strategies.
The marginable securities secure the broker’s loan, meaning that if the value of the collateral falls below certain levels, the broker may require additional funds or sell securities to cover the loan. Therefore, the presence and value of marginable securities are fundamental to maintaining a margin account. Without sufficient marginable assets, the ability to borrow and maintain leveraged positions would be restricted.