Five Hundred Dollar Rule

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.

BREAKING DOWN '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.

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