Margin Requirements and Regulation T
When it comes to investing in stocks on the margin, there are many different rules and regulations that come into play. However, there is one regulation that applies to all investors for the purchase of any stock.
Regulation T, known better as Reg. T, stipulates that investors may borrow up to 50 percent of the purchase price of securities at the time of purchase. This requirement is federally mandated by the Federal Reserve pursuant to the Securities and Exchange Act of 1934. This minimum requirement at the time of purchase is known as the Initial Margin Requirement. Although a brokerage or securities firm may choose to require a higher initial margin on some or all stocks, no more than 50 percent credit may be extended.
After the initial purchase of stock, the margin requirements change. The Financial Industry Regulatory Authority, or FINRA (previously known as the NASD) requires that all brokerages also require customers to maintain a minimum 25 percent equity in their account based upon the current market value of all securities held in the account. Known as the maintenance margin, this rule ensures that if the price of an investor’s positions falls significantly that additional monies be deposited into the account, or the positions sold off. Again, individual brokerage firms may set more stringent maintenance margin requirements if they choose.
If the equity in the brokerage account is not sufficient the investor will receive a margin call. A margin call requires that the investor deposit additional cash or securities, or sell securities to bring the equity in the account above the required percentage. If the investor does not remedy the situation with additional deposits or by making suitable transactions, the brokerage may sell securities within the account to meet the margin requirements.