Non-marginable securities are those ineligible for purchase on margin at specific brokerage firms or financial institutions. Instead, these purchases must be fully funded by the investor’s own cash.
Most brokerage firms maintain internal lists of non-marginable securities accessible online or through direct contact. These lists are periodically adjusted to reflect changes in share prices and volatility. Holdings in non-marginable securities don’t enhance the investor’s margin buying power.
Key Takeaways
- Non-marginable securities need complete funding through the investor’s cash rather than margin.
- Such securities help mitigate risks and manage costs associated with highly volatile stocks.
- Non-marginable securities encompass recent IPOs, penny stocks, and over-the-counter bulletin board stocks.
- Using marginable securities can result in margin calls, forcing the liquidation of securities and potential financial losses.
- Securities eligible as collateral in margin accounts are known as marginable securities.
The Mechanism Behind Non-Marginable Securities
The primary objective of designating certain securities as non-marginable is to reduce risk and manage the administrative costs linked to excessive margin calls on typically volatile stocks with unpredictable cash flows.
Examples of non-marginable securities include freshly launched initial public offerings (IPOs). An IPO denotes the first instance when a company offers its shares to the public. Penny stocks and over-the-counter bulletin board stocks, primarily owned by small companies and trading for less than $5 per share, also fall under non-marginable securities, as regulated by the Federal Reserve Board.
Other categories, such as stocks trading below $5 per share or those showing extraordinary volatility, may also be exempted by the broker’s discretion. Stocks with low trading volumes aren’t typically marginable either.
Marginable vs. Non-Marginable Securities
Marginable securities can be used as collateral within a margin account. The worth of these securities can contribute towards initial and maintenance margin requirements, allowing them to be borrowed against. Conversely, non-marginable securities can’t be posted as collateral in margin accounts.
Despite their potential for amplifying returns, marginable securities could result in margin calls, leading to unplanned liquidation of securities and possible financial setbacks, heightening potential losses.
Real-Life Examples of Non-Marginable Securities
Firms like Charles Schwab design their margin requirements such that certain securities remain non-marginable. Schwab permits most stocks and ETFs as marginable securities, provided the share price is $3 or higher.
Mutual funds become marginable after being held for over 30 days. Investment-grade corporate, treasury, municipal, and government bonds also qualify as marginable. IPOs with high-volatility levels aren’t immediately marginable, but they become so if bought one business day post-IPO on the secondary exchange.
Special Considerations
Non-marginable securities demand a 100% margin requirement. Additionally, certain stocks come with special margin requirements and have higher maintenance margins than other standard stocks.
For example, Charles Schwab generally mandates a 30% initial maintenance margin. However, for excessively volatile stocks like AMC Entertainment and Gamestop, the maintenance margin requirements are much stricter: 100% for long positions and up to 300% for short positions.
Note: Investing comes with risks, including the potential loss of principal. Always consider your investment objectives, risk tolerance, and financial circumstances carefully before proceeding.
Related Terms: margin account, margin call, IPO, penny stocks, volatile stocks.
