Margin Account Required for Margin Trading
When an investor purchases shares of a security, they may either pay the full purchase price, or they may borrow a percentage of the purchase price from the brokerage holding the account. This loan is known as a margin loan. However, in order to buy margin requirements stocks, the customer must open a margin account.
By default, new customer accounts are cash accounts and cannot be used to buy securities on margin. To establish a margin account, the customer must read and sign additional disclosures, as well as attest to a minimum experience level for trading stocks. These requirements are minimal and easily fulfilled as long as the customer specifies their desire to have their account margin enabled.
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.
Day Trading Margin Requirements for Stocks
Any brokerage customer that buys and then sells or sells short and then buys the same security on the same day more than four times in five business days is considered a “pattern day trader.” (There is an exception if such trades make up less than six percent of the customer’s total trades during the same five day period.)
Pattern day traders must maintain a minimum equity in of $25,000 in addition to both the initial margin requirement and all maintenance margin requirements.
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