Definition
Non-marginable securities are financial assets that cannot be purchased using borrowed funds from a brokerage. Investors must use their own cash to buy these types of securities, as brokerage firms classify them as ineligible for margin trading due to various factors such as liquidity, volatility, or regulatory restrictions.
Types of Non-Marginable Securities
- Over-The-Counter (OTC) Stocks: These are securities not listed on major exchanges and are often excluded from margin eligibility because of their higher risk and lower liquidity.
- Penny Stocks: Shares traded at a low price (typically under $5) with low market capitalization. Due to high volatility and risk, they are generally considered non-marginable.
- New Issues and IPOs: Newly issued stocks, including those listed in Initial Public Offerings (IPOs), are often non-marginable for a certain period after their initial offering.
- Mutual Funds: Generally, mutual funds must be held in a brokerage account for a specific duration (e.g., 30 days) before becoming marginable, although some might never qualify.
Regulatory and Brokerage Policies
Non-marginable status can arise from both regulatory rules set by bodies like the Financial Industry Regulatory Authority (FINRA) and individual brokerage policies aimed at risk management.
Examples of Non-Marginable Securities
- ABC Penny Stock: A stock traded at $3 per share, considered highly volatile with a low market cap.
- XYZ OTC Stock: A security traded on an over-the-counter market, susceptible to illiquidity and higher risks.
- NewTech IPO: Newly listed shares of a tech startup which cannot be bought on margin for the first 30 days.
Non-Marginable vs. Marginable Securities
| Feature | Marginable Securities | Non-Marginable Securities |
|---|---|---|
| Purchase Method | Can be bought on credit | Must be bought with investor’s own cash |
| Example Assets | Blue-chip stocks, major index ETFs | OTC stocks, penny stocks, new issues |
| Risk Level | Generally lower | Generally higher |
| Regulatory Oversight | Subject to strict margin regulations | Less stringent in terms of margin trading rules |
| Volatility | Typically lower | Higher |
Special Considerations
- Risk Management: Non-marginable securities often carry higher risk, making them unsuitable for margin trading.
- Cost Implications: Investors must fully fund purchases, affecting cash flow and potentially limiting investment capacity.
FAQs
Why are some securities non-marginable?
Can non-marginable securities become marginable over time?
What happens if I try to buy non-marginable securities on margin?
Related Terms
- Margin Call: A brokerage demand on the investor to deposit additional funds or securities to cover potential losses.
- Leverage: The use of borrowed capital to increase the investment potential return.
- Equity: The market value of securities in a margin account minus the amount borrowed from the brokerage.
Summary
Non-marginable securities present a specific set of characteristics and risks that exclude them from margin trading. Understanding the distinction between marginable and non-marginable assets ensures better investment decisions and compliance with brokerage and regulatory standards. These securities require full cash funding, often reflecting higher volatility and risk profiles.
References
- FINRA Regulatory Notices.
- Brokerage Margin Policies.
- Financial Markets and Risk Management Textbooks.
By comprehending the nuances of non-marginable securities, investors can better navigate the complexities of portfolio management and trading practices.
