Trading Skills

non-margin securities

What are non-margin securities?

Margin purchases of non-margin securities at certain brokerage firms or financial institutions are not permitted. They must be fully funded by the investor’s cash.

Most brokerage firms have an internal list of non-margin securities that investors can find online or by contacting their institution. These lists will be adjusted over time to reflect changes in share prices and volatility. Holding non-margin securities does not increase an investor’s margin purchasing power.

key takeaways

  • Margin purchases of non-margin securities at certain brokerage firms or financial institutions are not permitted and must be fully funded by the investor’s cash.
  • Set up margin-free securities to reduce risk and control costs for volatile stocks.
  • Non-margin securities include recent IPOs, penny stocks and over-the-counter bulletin board stocks.
  • The disadvantage of margin securities is that they can lead to margin calls, which in turn can lead to liquidation of securities and financial loss.
  • Securities that can be credited to a margin account as collateral are called marginable securities.

How non-margin securities work

The main goal of keeping some securities away from margin investors is to reduce risk and control the administrative costs of excessive margin calls, which are often volatile stocks with uncertain cash flows.

Examples of unmargined securities include the recent initial public offering (IPO). When the news media reports that a company is selling stock to the public for the first time, it’s called an initial public offering. Over-the-counter bulletin board and penny stocks, which typically trade below $5 per share, are owned by small companies, and are also non-margin securities under Federal Reserve decree.

Other securities, such as stocks priced below $5 or extremely volatile, may be excluded at the broker’s discretion. Some small lot securities are also not available for margin trading.

Marginable Securities vs Non-Marginable Securities

Marginable securities are securities that can be posted as collateral in a margin account. The balance of these securities can be included in the initial margin and maintenance margin requirements. Margin securities allow you to borrow against them. However, non-margin securities cannot be used as collateral in brokerage margin accounts.

The disadvantage of margin securities is that they can lead to the aforementioned margin calls, which can include unexpected liquidations of securities. Margin securities can magnify returns but can also exacerbate losses.

Example of Unmargined Securities

Charles Schwab sets its margin requirements so that certain securities are not marginable. Schwab allows most stocks and ETFs as margin securities as long as the share price is $3 or higher.

Likewise, mutual funds are permitted if they are owned for more than 30 days, as are investment grade corporate bonds, treasuries, municipal bonds, and government bonds. IPOs that exceed a certain volatility level are not fundable. However, margin trading is possible if the IPO is purchased one business day after the IPO on the secondary exchange.

special attention items

Unmargined securities have a 100% margin requirement. However, certain stocks have special margin requirements. Stocks with special margin requirements are marginable, but they have higher margin requirements than general stocks and the minimum required by brokers.

For example, Charles Schwab typically requires an initial maintenance margin of 30%. For some volatile stocks, the initial maintenance margin is higher. These stocks include AMC Entertainment (AMC), which has a special maintenance margin of 100% for long positions and 200% for short positions. Meanwhile, Gamestop (GME) has a maintenance margin of 100% for long positions and 300% for short positions

lidero does not provide tax, investment or financial services and advice. This information is provided without consideration of any particular investor’s investment objectives, risk tolerance or financial situation and may not be suitable for all investors. Investing involves risks, including possible loss of principal.

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