Limitations on Margin AccountsAbuses of margin trading were one of the major contributing factors to the market crash that began the Great Depression. To prevent that kind of catastrophe from occurring again, the federal government and securities exchanges have implemented rules that limit what can be done with margin accounts. Engaging in margin trading has special risks and complexities associated with it and is not suitable for most investors.
With margin trading, you may not borrow the full amount of your portfolio.Federal Reserve regulations apply restrictions to margin accounts. You may not borrow the full amount of your portfolio. The Federal Reserve Board (FRB) regulates the amount of credit brokers can extend to their customers. Currently, you can borrow up to 50 percent of the value of your marginable stocks. In the past, it has varied between 40 and 100 percent. Margin trading has special risks and complexities associated with it, and it is not suitable for many investors.
The New York Stock Exchange Minimum Initial Equity Requirement requires that your equity be at least $2,000 whenever you enter into a new margin account transaction.
The NYSE Minimum Maintenance Rule requires that the equity in your account be at least 25 percent of the current market value of the margined securities.
Not all securities are marginable. Your broker can tell you which ones do not apply. However, the list of non-marginable securities is small, but your brokerage firm may have its own requirements. Generally, money market funds, municipal bond funds, and some bonds are not marginable.
Your broker charges interest on the margin loan as long as it is not repaid. The rates vary but generally will go down as the amount you borrow increases.
Securities used as collateral may not be received in your name. They must remain in the margin account in the "street name." You will receive credit into your account for any dividends they pay. You may remove the shares from the margin account after the loan is repaid.
Furthermore, you should be aware of the following:
- The brokerage firm can force the sale of securities in your account if the equity in the account falls below the maintenance margin requirements.
- You are accountable for any shortfall in the account after a margin causes liquidation.
- You are not entitled to extensions of time on a margin call.
- You may incur additional finance charges when the firm arranges loans for its customers and as a result face additional credit risks.
If the value of your collateral rises, you can withdraw the amount over your minimum requirement or use it for additional loans.