Five Hundred Dollar Rule

AAA

DEFINITION of 'Five Hundred Dollar Rule'

A regulation that prevents a bank or firm from liquidating a client's account to cover a margin call, if the amount of the margin call is equal to or less than $500. The five hundred dollar rule is mandated by the Federal Reserve, and is used to keep relatively small financial deficiencies, that could be readily solved, from resulting in the automatic sale of an investment position. This rule was later changed to $1,000.

INVESTOPEDIA EXPLAINS 'Five Hundred Dollar Rule'

For example, a broker places an order to purchase shares on behalf of an investor using a margin account. To cover the margin, the investor places shares of another security as collateral, with the total value of the collateral securities being a certain percentage of the amount on margin.


If the value of the securities of the collateral dips below the required percentage - even if by a fraction of a percent - the broker could liquidate shares purchased on margin to cover the difference. The five hundred dollar rule prevented this from happening, if this dip is under $500.

RELATED TERMS
  1. Margin

    1. Borrowed money that is used to purchase securities. This practice ...
  2. Margin Call

    A broker's demand on an investor using margin to deposit additional ...
  3. Margin Account

    A brokerage account in which the broker lends the customer cash ...
  4. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin ...
  5. Minimum Margin

    The initial amount required to be deposited in a margin account ...
  6. Federal Reserve Board - FRB

    The governing body of the Federal Reserve System. The seven members ...
RELATED FAQS
  1. What's the difference between the coverage ratio and the levered free cash flow to ...

    Coverage ratios focus on a company’s ability to manage its debt, while the levered free cash flow to enterprise value ratio ... Read Full Answer >>
  2. What is the Federal Reserve Board's market risk capital rule?

    The Federal Reserve Board’s market risk capital rule, or MRR, sets forth the capital requirements for banking organizations ... Read Full Answer >>
  3. How do I learn technical skills for trading commodities?

    Many resources are available for those seeking to learn to trade commodities, also known as futures, directly from the major ... Read Full Answer >>
  4. What are the different sources of business risk?

    A certain risk level is inherent in running a business. A company cannot completely eliminate risk, but it can control or ... Read Full Answer >>
  5. How does the law of supply and demand affect monetary policy in the United States?

    The law of supply and demand affects monetary policy in the United States through the adjustment of interest rates. Interest ... Read Full Answer >>
  6. How does DuPont Analysis measure financial leverage?

    DuPont analysis uses something called the "equity multiplier" to measure financial leverage. The equity multiplier is calculated ... Read Full Answer >>
Related Articles
  1. Investing Basics

    Finding Your Margin Investment Sweet Spot

    Borrowing to increase profits isn't for the faint of heart, but margin trading can mean big returns.
  2. Options & Futures

    Leveraged Investment Showdown

    Margin loans, futures and ETF options can all mean better returns, but which one should you pick?
  3. Forex Education

    Adding Leverage To Your Forex Trading

    The use of margin to trade in the foreign exchange market can magnify profit opportunities.
  4. Retirement

    The Best Way To Borrow

    There are many avenues from which to drum up funding. Find out the pros and cons of each.
  5. Economics

    Will The US Economy Rebound In The 2nd Quarter?

    Most investors know that U.S. 1st quarter growth numbers aren’t pretty. Economic statistics have been missing expectations by the largest margin since 2009
  6. Economics

    The U.S. Economy May Be Stronger Than You Think

    While the economic performance in the U.S. broadly disappointed in the first quarter, temporary factors presented one-off events that depressed output.
  7. Investing

    Pockets Of Value In The Stock Market

    U.S. stocks benefited from signs the Fed’s path toward higher interest rates, as well as from continued merger-and-acquisition activity on of low rates.
  8. Economics

    Why Is The Federal Reserve Independent?

    An overview of the independent status of the Federal Reserve and arguments for and against it.
  9. Brokers

    Private Equity's Returns Are Tempered By Its Risks

    Private equity firms adopt approaches to quickly hike up earnings and boost returns, but these investments come with big risks too.
  10. Credit & Loans

    The Pros & Cons Of Personal Loans vs. Credit Cards

    One is not like the other. We help you decide where to borrow money from.

You May Also Like

Hot Definitions
  1. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  2. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  3. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  4. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
  5. Adverse Selection

    1. The tendency of those in dangerous jobs or high risk lifestyles to get life insurance. 2. A situation where sellers have ...
Trading Center