DEFINITION of Marginable
Marginable securities trade on margin through a brokerage or other financial institution. Securities with high liquidity and market capitalization are more likely to be marginable, such as stocks like Apple (AAPL) and Bank of America (BOA). Other securities, such as stocks priced below $5 per share and initial public offerings (IPOs), are typically not marginable due to the higher risks associated with them. Most brokers publish a full list of the marginable securities they offer on their website.
BREAKING DOWN Marginable
The rules governing which securities are marginable and which are not are set out in Regulation T and Regulation U of the Federal Reserve. Self-regulatory organizations such as the NYSE and FINRA are also involved in the regulatory process. Although individual brokers can adopt their own requirements, they must be at least as strict as those prescribed by law.
The distinction between marginable and non-marginable securities exists for two main reasons. First, it protects investors by reducing the risks associated with the use of leverage. Second, it protects brokers and other financial institutions by ensuring that the collateral they receive from investors meets minimum standards of quality.
Purchasing Marginable Securities
Investors must buy marginable securities through a margin account. These accounts require a minimum investment of $2,000; however, some brokers require more. Investors can then borrow up to 50% of the purchase amount of the marginable security. For example, if an investor opens a $50,000 margin account, they can purchase up to $100,000 of a marginable security. Investors can borrow less than 50% of the purchase price of the marginable security if they so choose. For instance, an investor may only want to borrow up to 25% of the purchase price.
Margin accounts also require a maintenance margin. This is a minimum balance that must be maintained to control the securities held in the account. The maintenance margin fluctuates on a daily basis as the value of the securities in the account increase and decrease in value. For example, if the stocks in a margin account fall, the maintenance margin increases. If the margin account falls below the maintenance margin, the customer receives a margin call - a broker's demand for additional funds or securities to return the account to the minimum maintenance margin.
Purchasing marginable securities is more suitable for short-term hold times because of the interest investors have to pay on their margin loan. As the interest accrues over time, the more the marginable securities have to return to break even. (To learn more, see: Simulator How-To Guide: Margin Accounts.)