Margin is the practice of borrowing money to buy stock. Using margin can help to increase the impact of a growing market, but it also increases the risk that you face in a declining market. Both the Financial Industry Regulatory Authority, Inc., usually called FINRA, and the federal government issue regulations on how margin accounts can operate.
Minimum Share Prices
With the exception of stocks that are traded on the over-the-counter market, neither FINRA nor the government's Regulation T specify a minimum share price for a security to be eligible to be purchased on margin. They do require that investors have at least $2,000 of equity in their account, though. The regulations also require that investors initially deposit at least half of the money needed to buy the stock and that they maintain an equity position of at least 25 percent in their account at all times.
Minimum OTC Share Prices
Securities that are traded on the over-the-counter market are regulated differently. Section 220.11 of Regulation T specifies that OTC stocks must have an average bid price of $5 per share to be eligible to be added to the list of stocks that can be bought on margin. To remain on the list of eligible stocks, their price must remain at or above $2 per share.
Brokerage Price Limits
Individual brokerages can set their limits wherever they wish, as long as they are no more liberal than the rules set forth by FINRA and by Regulation T. For example, Fidelity, TradeKing and ScotTrade will not issue margin loans on any stock with a price of under $3 per share, regardless of the exchange on which it trades. Fidelity also will not let investors buy shares from Initial Public Offerings on margin.
Brokerage Margin Limits
Individual brokerages can also impose their own margin and equity limits, and some tie their margin limits to share prices. ScotTrade, for example, has a 30 percent equity requirement on shares that cost $5 or more, but requires 50 percent equity on shares costing between $3 and $4.99. Other firms, like Fidelity or TradeKing, do not.
Video of the Day
- FDIC: 7500 - FRB Regulations Part 220 -- Credit by Brokers and Dealers (Regulation T)
- FINRA: Purchasing on Margin, Risks Involved With Trading in a Margin Account
- TradeKing: Margin Requirements & Rates
- ScotTrade: Marginable Equity
- Fidelity: Trading FAQs: Margin
- Fidelity: Trading Commissions and Margin Rates