What Are Non-Marginable Securities?
Non-marginable securities are securities that are not allowed to be purchased on margin at a particular brokerage or financial institution. These securities must be 100% funded by the investor's cash, and holdings in non-marginable securities do not add to the investor's margin buying power.
- Non-marginable securities must be completely funded by an investor’s cash.
- Non-marginable securities are put in place to mitigate risks and control costs on stocks that are volatile.
- Non-marginable securities include recent IPOs, penny stocks, and over-the-counter bulletin board stocks.
- Securities that may be posted in a margin account as collateral are known as marginable securities.
- The downside of marginable securities is that they can lead to margin calls, which in turn cause the liquidation of securities and financial loss.
How Non-Marginable Securities Works
Most brokerage firms have internal lists of non-marginable securities, which investors can find online or by contacting their institutions. These lists will be adjusted over time to reflect changes in share prices and volatility.
The main goal of keeping some securities away from margin investors is to mitigate risk and control the administrative costs of excessive margin calls on what are usually volatile stocks with uncertain cash flows.
Non-marginable securities have a 100% margin requirement. But certain stocks have special margin requirements, however. The stocks with special margin requirements are marginable, but they have a higher margin requirement than typical stocks and the minimum required by brokers.
For example, Charles Schwab typically requires an initial maintenance margin of 30%. For certain volatile stocks, the initial maintenance margin is higher. These stocks include Advanced Micro Devices (AMD), which has a special maintenance margin of 40%. Tesla (TSLA), meanwhile, has a unique maintenance margin of 75%.
Types of Non-Marginable Securities
Examples of non-marginable securities include recent initial public offerings (IPOs). When a news outlet reports a company is making the first-ever offer to sell shares to the public, this is known as an IPO. Over-the-counter bulletin board stocks and penny stocks, which are stocks that generally trade per share for under $5, and are owned by small companies. All of the previously listed stocks are non-marginable by decree of the Federal Reserve Board.
Other securities, such as stocks with share prices that are under $5, or that are extremely volatile may be excluded at the discretion of the broker. Now, some low volume securities also aren’t marginable.
Marginable vs. Non-Marginable Securities
Marginable securities are those that can be posted as collateral in a margin account. The balance of these securities can count toward the initial margin and maintenance margin requirements. Margin securities allow you to borrow against them. However, non-marginable securities can’t be pledged as collateral in a brokerage margin account.
The downside of marginable securities is that it can lead to the aforementioned margin calls, which can include the unexpected liquidation of securities. Marginable securities can amplify returns, but it may also exacerbate losses.
Example of Non-Marginable Securities
Charles Schwab sets its margin requirements so that certain securities are not marginable. Schwabl allows most stocks and ETFs as marginable securities, as long as the share price is $3 or higher.
As well, mutual funds are allowed if they’re owned form more than 30 days, as are investment-grade corporate, treasury, municipal, and government bonds. IPOs above a certain volatility level are not marginable; however, other than that, IPOs are marginable if they are purchased one business day after the IPO on the secondary exchange.