What Are Non-Marginable Securities?
Let me explain non-marginable securities directly: these are investments you can't buy on margin at a specific brokerage or financial institution. You have to pay for them entirely with your own cash.
Most brokerages maintain their own lists of these securities, which you can check online or by reaching out to them. These lists get updated as share prices and volatility shift. Remember, holding non-marginable securities doesn't boost your margin buying power at all.
Key Takeaways
To sum it up assertively, non-marginable securities can't be purchased on margin and require full cash payment from you as the investor. They're implemented to cut down risks and manage costs on volatile stocks. Examples include recent IPOs, penny stocks, and over-the-counter bulletin board stocks. On the flip side, marginable securities can trigger margin calls, forcing liquidation and potential losses. Marginable securities are those you can post as collateral in a margin account.
How Non-Marginable Securities Work
The primary purpose here is to keep certain securities out of reach for margin buyers, which helps mitigate risk and control the administrative burden of too many margin calls on typically volatile stocks with unpredictable cash flows.
Take recent initial public offerings (IPOs) as an example—these are when a company first sells shares to the public, as reported in the news. Over-the-counter bulletin board stocks and penny stocks, which trade under $5 per share and belong to small companies, are also classified as non-marginable by the Federal Reserve Board.
Brokers might exclude other securities at their discretion, such as those priced under $5, highly volatile ones, or low-volume stocks.
Marginable vs. Non-Marginable Securities
Marginable securities are the ones you can use as collateral in your margin account, counting toward initial and maintenance margin requirements, and allowing you to borrow against them. Non-marginable ones, however, can't be pledged that way in a brokerage margin account.
The drawback with marginable securities is they can result in margin calls, potentially leading to sudden liquidation of your holdings. They can boost your returns, but they also heighten losses.
Example of Non-Marginable Securities
Consider Charles Schwab's approach: they set margin rules where certain securities aren't marginable. They allow most stocks and ETFs if the share price is $3 or higher.
Mutual funds qualify if you've held them over 30 days, along with investment-grade corporate, treasury, municipal, and government bonds. High-volatility IPOs aren't marginable, but you can margin them if bought one business day after the IPO on the secondary market.
Special Considerations
Non-marginable securities come with a 100% margin requirement. That said, some stocks have special margin requirements—they're still marginable but demand higher margins than usual.
For instance, Charles Schwab usually requires a 30% initial maintenance margin. But for volatile stocks like AMC Entertainment (AMC), it's 100% on long positions and 200% on short positions. GameStop (GME) has 100% on long and 300% on short positions.
Keep in mind, this information isn't tax, investment, or financial advice from me or Investopedia. It's presented without regard to your specific objectives, risk tolerance, or circumstances, and it might not suit everyone. Investing carries risks, including potential loss of principal.
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