Non-Marginable Securities
Contents
Understanding Non-Marginable Securities: Risks, Exclusions, and Special Considerations
Deciphering Non-Marginable Securities
Defining the Concept: Non-marginable securities refer to assets that cannot be purchased on margin at a particular brokerage or financial institution. These securities must be fully funded by investors' cash and are typically excluded from margin accounts to mitigate risks associated with volatility.
Internal Lists and Adjustments: Brokerage firms maintain internal lists of non-marginable securities, which investors can access online or by contacting their institutions. These lists are periodically adjusted to reflect changes in share prices and market volatility, ensuring compliance with regulatory requirements.
Exploring Non-Marginable Securities
Mitigating Risks and Controlling Costs: The primary objective of excluding certain securities from margin trading is to mitigate risk and control administrative costs associated with margin calls. Non-marginable securities often comprise volatile stocks with uncertain cash flows, making them susceptible to excessive margin calls and potential financial losses.
Examples of Non-Marginable Securities: Non-marginable securities encompass various asset classes, including recent initial public offerings (IPOs), over-the-counter bulletin board stocks, and penny stocks trading below $5 per share. Additionally, stocks with share prices under $5, extreme volatility, or low trading volume may be excluded at the broker's discretion.
Differentiating Marginable and Non-Marginable Securities
Marginable Securities: Marginable securities are eligible for collateralization in margin accounts, allowing investors to leverage their positions. These securities contribute to initial and maintenance margin requirements, enabling investors to borrow against them to amplify returns.
Risk and Reward: While marginable securities offer potential for increased returns through leverage, they also entail risks, including margin calls that may result in forced liquidation of securities. Non-marginable securities, on the other hand, cannot be pledged as collateral in margin accounts, limiting investors' ability to leverage their positions.
Illustrative Examples and Special Considerations
Charles Schwab's Margin Requirements: Charles Schwab imposes margin requirements on securities, with certain stocks deemed non-marginable based on volatility levels. For instance, AMC Entertainment (AMC) and Gamestop (GME) have special maintenance margin requirements due to their high volatility, emphasizing the importance of risk management in margin trading.
Special Margin Requirements: Some stocks have unique margin requirements, exceeding the standard minimum set by brokers. AMC and GME, for example, have higher maintenance margin requirements to mitigate risks associated with their volatile price movements.
Disclaimer: It's important to note that non-marginable securities and special margin requirements vary among brokerage firms and are subject to change. Investors should consult their brokers and consider their risk tolerance and financial circumstances before engaging in margin trading.