Timing is everything when it comes to buying and selling stocks – particularly when you are only holding positions for days or weeks at a time. If you don’t make your move at exactly the right moment, the best-case scenario is missing out on profits. In the worst-case scenario, you wait just a bit too long, buy at the peak, and lose a significant portion of your principal investment.
The problem is that you don’t always have cash on hand to buy according to your carefully considered strategy. The good news is that in some cases, there is a solution. Your brokerage firm may be willing to lend you the cash you need for certain trades – but there are a number of conditions that must be met to be eligible for this type of loan.
Here’s everything you need to know about what stocks are marginable.
What Is Margin For A Stock?
In the same way commercial banks make mortgage loans for homes, brokerage firms offer secured loans to qualified clients for the purpose of purchasing eligible securities.
The amount of credit depends on a number of factors, but generally speaking, you can borrow up to 50 percent of the purchase price of the relevant asset. In other words, it is possible to double your buying power.
A second and perhaps more interesting option that margin accounts offer is the opportunity to borrow against eligible securities you already own to buy additional securities – assuming they are also marginable. In that scenario, you can purchase the assets you want when you want them without coming up with additional cash.
The assets in your portfolio serve as collateral for the loan. If your investments lose value, you may exceed the parameters of your margin account. When that happens, your brokerage will require you to add funds or sell some of your assets to bring your account in line with your margin agreement – otherwise known as a margin call.
Keep in mind that, as with any sort of loan, there is interest associated with your margin account. Buying securities on margin will reduce your total returns.
What Makes A Stock Marginable?
There are federal regulations that set parameters around what stocks are marginable – that is, what stocks can be purchased with credit from a brokerage firm. The two most commonly cited are Regulation U and Regulation T, which specify the maximum 50 percent loan against marginable securities.
At a minimum, brokerage firms have to meet the standards set by regulatory agencies. However, some choose to put higher standards in place when determining what stocks are eligible for margin. This could be due to a variety of reasons, including experience with heavy losses after allowing clients to buy higher-risk securities on margin.
What Stocks Are Eligible For Margin?
High liquidity makes stocks more likely to be marginable, as they are easily bought and sold.
On the flip side, some stocks that trade at extremely low volume are not eligible for margin. Other types of high-risk securities are typically not marginable. Examples include those priced at less than $5 per share, i.e., “penny stocks”, or those that are new public offerings, i.e., Initial Public Offerings (IPOs).
Stocks that often experience higher-than-average volatility may not be included on brokers’ margin lists. Some firms choose to permit the purchase of specific highly volatile stocks on margin, but instead of the usual 50 percent cash/margin split, they require a higher ratio of cash to credit.
The goal of the regulations and policies is to protect investors and brokers by reducing the likelihood of losses on borrowed money.
How Do You Know If A Stock Is Marginable?
You will have a general idea of whether a stock is marginable by knowing the basics of margin requirements. Clearly, solid companies that have been trading for some time on standard exchanges are likely candidates.
However, if the stock you have your eye on doesn’t fit neatly into standard parameters, check with your broker.
Most put their list of what stocks are marginable online, so you can get the answers you need before the opportunity passes.
What Determines If An OTC Stock Is Marginable?
OTC or Over-The-Counter stocks are generally not marginable. The standard rule is that stocks must be listed on a major exchange, such as the New York Stock Exchange (NYSE), before they can be considered marginable. However, there are four levels of OTC stocks and not all fall under the category of non-marginable.
Any OTC security that gains the designation of a National Market System security (NMS) under NASDAQ requirements automatically qualifies as an OTC margin stock. Your broker will be able to tell you whether the specific OTC stock you are interested in is a marginable OTC stock.
What Stocks Are Marginable: The Bottom Line
The bottom line is that lower-risk stocks are likely to be marginable, while high-risk stocks are not. There are some securities that fall into a gray area. They aren’t obviously high-risk, like penny stocks and IPOs.
However, they have elements that make certain brokerage firms unwilling to lend. Check with your broker to determine what stocks are marginable with your account.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.